Customers reacted to severe allegations of wrongdoing by the SEC yesterday.
The massive outflow of funds from the crypto asset trading platform Binance is becoming immediate after the complaint launched yesterday by the SEC of irregular diversion of billions of customer money. In the last 24 hours, Binance has suffered fund outflows of $780 million (€730 million), according to data from data firm Nansen. U.S. subsidiary Binance.US reportedly recorded outflows of another $13 million in the last few hours.
SEC sues Binance, Coinbase
Binance, the world’s largest cryptocurrency exchange platform, and its CEO, Changpeng Zhao, have been sued Monday by the U.S. Securities and Exchange Commission for allegedly violating federal securities laws. The complaint includes 13 allegations against firms associated with the exchange, which authorities say operates without authorization in the country.
“Through 13 indictments, we allege that Zhao and associated companies engaged in an extensive web of deceit, conflicts of interest, failure to disclose key facts and willful evasion of the law,” Gary Gensler, the SEC chairman, said in a press release this afternoon. “They attempted to evade U.S. securities laws by announcing false controls that turned out to be nonexistent solely to keep U.S. customers inside their platform,” Gensler summarized in the filing.
The SEC’s complaint, filed in the U.S. District Court for the District of Columbia, claims that since July 2017, Binance.com and Binance.US earned revenues of at least $11.6 billion (€10.832 billion, at current exchange rates) in fees charged to their customers. However, the companies were not registered to offer exchange, broker, or clearinghouse services.
Government Crypto Push
The Commodity Futures Trading Commission (CFTC) filed a similar complaint against the company in late March. The SEC goes a step further by accusing Zhao of misusing customer funds through the diversion of customer funds to an associated firm, Sigma Chain. Through this company’s operations, Binance artificially increased market volume. The situation is reminiscent of the FTX bankruptcy and the fraud executed through Alameda Research, Sam Bankman-Fried’s trading house.
The similarities to the FTX crash do not stop there. The lawsuit accuses Binance of “deficient financial controls” and deems it possible that the platform’s management could use customer funds for personal use. “Without regulatory oversight, the defendants were free to transfer assets solely at their discretion, commingling and diverting them in ways regulated entities would not have been able to do,” the court filing details.
The company’s first response has come via Twitter. Zhao has shared a message on his profile in which he emphasized that he “has not yet seen the lawsuit.” At the same time, he has specified that the platform remains “stable,” with no interruptions in its withdrawal and deposit services.
Coinbase Shares plummet
Shares of the world’s second-largest cryptocurrency exchange in terms of trading volume, Coinbase, plunged following news of a lawsuit filed by the U.S. Securities and Exchange Commission (SEC). This morning, Coinbase ($COIN) shares were trading at approximately USD 63.4. However, at the opening of the markets on Tuesday, July 6, the stock dropped to USD 47. This is one of the most significant drops in the history of Coinbase shares.
After the fall, the stock experienced a slight recovery and, at the time of publication of this article, is trading above USD 50. The company has lost almost USD 5 billion in market value due to this fall, and its current capitalization is around USD 10 billion. The SEC is suing Coinbase for allegedly violating securities laws that require exchange operators to have the necessary licenses to operate in the markets. According to the complaint document:
“Coinbase has never registered with the SEC as a broker, national securities exchange or clearing agency, thereby evading the disclosure regime Congress has established for our securities markets.”SEC
Coinbase is an exchange that trades cryptocurrencies. However, the SEC alleges that some are securities, such as SOL, ADA, MATIC, FIL, SAND, AXS, CHZ, FLOW, ICP, NEAR, VGX, DASH, and NEXO. This is the second lawsuit against an exchange so far this week, as, on Monday, the SEC filed a lawsuit against Binance, the largest exchange. In that case, the SEC also alleged violating federal laws for operating without a license. Unlike the Binance case, where Bitcoin experienced a 6% drop after the news broke, the lawsuit against Coinbase did not considerably impact the price as of press time.
The regulator also alleges that Binance improperly sold cryptocurrencies, including its own BNB and BUSD tokens, as both digital currencies were required to comply with the investor protection rule. Authorities now add at least ten new digital assets to their list of securities to be regulated. The SEC has insisted that investors opting for such currencies have no control over what happens with them. Moreover, unlike banks – which must comply with specific capital ratios and are subject, in the European case, to the various national Deposit Guarantee Funds (DGF) – the platforms do not have to report on their balance sheet or on whether they have “the means to pay the returns” promised.
Official efforts generate a fall in the price of the leading cryptocurrencies. Bitcoin dropped around 5% after the outlets released the news, while Binance’s token lost more than 8%.