On Monday, the U.S. Securities and Exchange Commission filed a lawsuit against Binance and Binance.US as well as Binance’s founder and CEO Changpeng Zhao. The SEC accused them of violating federal securities law.

claims that Binance.US, CZ and Binance offered unregistered security to the public, in the form BNB tokens and Binance-linked BUSD Stablecoins. also asserts that Binance staking service is against securities laws. BAM Trading, the operating company of Binance.US, and Binance themselves are also facing similar charges, such as failing to register as clearing agencies, brokers, and exchanges. The SEC also claimed that Binance permitted the commingling and mixing of funds from customers, that CZ “secretly” controlled Binance.US, and that an entity owned and operated by CZ inflated Binance.US’s trading volume.

Read more: Binance suffers $69M of net outflows within an hour, amid SEC charge: Nansen

The lawsuit also claimed that Binance had allowed U.S. people (meaning U.S. residents or citizens) to trade using its platform despite claiming it didn’t.

The suit stated that “as part of Zhao and Binance’s plan to shield them from U.S. regulations, they continuously claimed to the public the Binance.com Platform didn’t serve U.S. people, while simultaneously hiding their efforts to ensure the most valuable U.S. clients continued trading on the Platform,” Binance had announced, when the Binance.US Platform was launched in 2019, that it would implement controls to prevent U.S. users from using the Binance.com Platform. Binance actually did the opposite. Zhao instructed Binance to help certain high-value U.S. clients circumvent those controls, and to do this secretly because Binance didn’t want to “be held accountable” for these actions.”

The SEC alleges that a number other tokens are securities, including native coins for Solana (SOL), Cardano(ADA), Polygon(MATIC), Coti(COTI), and Algorand Blockchains (ALGO), Filecoin Network (FIL), Cosmos Hub (ATOM), Sandbox Platform (SAND), Axie Infinity (AXS), and Decentraland.

Binance’s Chief Compliance Officer allegedly told an employee that in 2018, “we were operating as an unlicensed security exchange in the USA.”

Diverting and commingling funds

The suit alleged that Binance’s poor financial controls led to the diversion of customer funds, possibly for personal use. Merit Peak Limited (a market maker tied to Zhao) had access to “billions of dollars” of customer funds, while Sigma Chain, an entity controlled by CZ, received almost $200 million from BAM Trading, and a BAM Trading custodial account, according to the SEC. CZ allegedly received $62.5 from a Binance bank account between October 2022 to January 2023.

The suit stated that “Lacking a regulatory oversight, defendants were free to transfer and did so, investors’ crypto- and fiat assets at their pleasure, sometimes commingling them and diverting in ways that properly licensed brokers, dealers and exchanges, as well as clearing agencies, would not be able to accomplish.”

The SEC also reported that Sigma Chain purchased a yacht worth $11 million on the account which had access to funds from customers.

According to the lawsuit, CZ owned 100 percent of a company called “CPZ Holdings Limited,” and that entity owned 100 percent of “BAM Management Company Limited.” BAM Management Company Limited owned 81% in “BAM Management US Holdings Inc.,” while the remaining equity went to former employees and seed investors. BAM Management US is the parent company of BAM Trading Services which operates Binance.US.

The SEC revealed the internal struggle between U.S. CEOs and CZ officials who controlled U.S. operations, despite assurances that they were independent. The U.S. operation complained about “shackles”, which required managers to get approval from global company for basic tasks.

Read more: Coinbase shares drop 10% following SEC’s suit against Binance

“I realized that the mission I thought I had signed up for was not the mission. As soon as I realised that, I left,” the former U.S. Chief Executive Officer Brian Brooks, who had taken over the U.S. Office of the Comptroller of the Currency after leaving the U.S. Treasury Department, is quoted in the lawsuit, although he is identified as “CEO B”. Brooks left Binance’s U.S. branch after only three months.

Brooks was particularly concerned about Merit Peak’s and Sigma Chain’s actions on Binance.US.

Brooks was quoted as saying, “Our customers could not, you know clear orders without those makers being on our platform. I thought that this was a serious problem.” It suggested that CZ was heavily dependent on the company, not only as a controlling person, but also as an economical counterparty.

According to the lawsuit, Catherine Coley was the first CEO of the U.S. operation. She complained internally that “the entire team is at breaking point” at one point, according to the suit.

Coley attempted to push what she called “Project 1776”, a reference the American Revolution. According to the lawsuit, she told a colleague that it was “for independence”.

Evading regulation

The SEC lawsuit refers to the so-called “Tai Chi” documents that Forbes first reported in 2020. This appeared to be Binance’s plan to leave the U.S. but still maintain a presence via an affiliate.

The lawsuit quotes Binance employees talking about ways to allow U.S. clients to trade on Binance.com.

The SEC also expressed concern that Binance had access Binance.US wallets, assets and custody tools, as well as the private keys of the U.S. entity.

The company also hired market makers, Merit Peak and Sigma Chain to increase trading volume at Binance.US. The SEC claimed that this created conflicts between CZ’s customers and Binance.US.

BAM Trading, which recruited market-making firms and other institutions to create and maintain liquidity for the Binance.US platform, offered low fees in order to attract them. Zhao and Binance had a close relationship, which put Zhao’s interests at odds with the trading platform that he controlled.

In the suit, it was also stated that Binance.US operated its own OTC Desk, and for a period of two years, its sole counterparty was Alameda Research. This company was founded by Sam Bankman Fried, creator of FTX. Alameda collapsed along with the rest of FTX’s empire in November last year.

‘Vigorously defend’

Binance.US, in an long tweet called the lawsuit “the latest example” of “regulation by enforcement,” and stated that it thought the suit was “baseless”.

Binance posted an statement to its blog. The company said it had “actively co-operated with the SEC investigations and worked hard to address their questions and concerns” as well as working towards a settlement.

The Staff had ample time to investigate and conduct an investigation. There is no justification for their action. The statement stated that all user assets on Binance, Binance affiliate platforms and Binance.US are secure and safe. We will vigorously fight any claims to the contrary.

Read more: Binance gives rising star Teng a key role to replace CEO Zhao at the largest crypto exchange

Gary Gensler, SEC chair, said in a press statement, “Through 13 charges, we claim that Zhao and Binance entities have engaged in a web of deceptions, conflicts of interests, non-disclosure, and calculated evasions of the law.”

A SEC spokesperson directed CoinDesk towards a press statement shared by the agency. Binance sent CoinDesk an email with a similar response to the blog post. The spokesperson said that the tokens listed by the SEC were not securities.

The SEC’s lawsuit is a continuation of allegations made by the U.S. regulator Commodity Futures Trading Commission in March this year that Binance, and its founder Changpeng Zhao, knowingly offered crypto derivatives in the U.S. in violation of federal law. The SEC lawsuit contains many of the same allegations as the CFTC complaint.

CZ, in a tweet, tweeted “4”, essentially calling the “news” “fud” (for fear and uncertainty).

The SEC wants to stop Binance, Binance.US, and “each” of their agents. The SEC wants Binance, Binance.US and “each of their respective agents” to stop violating federal laws.

The SEC wants to prohibit CZ and Binance from trading in any securities or participating as officers or directors of any issuers, including crypto assets.

The suit also said that the defendants would be prohibited from acting as unregistered brokers, clearing agencies or exchanges with crypto assets securities.

UPDATE (June 5, 2023, 15:23 UTC): Adds CZ tweet.

Update (June 5, 15.35 UTC) Adds information from the suit.

UPDATE (5 June, 16:00 UTC: Adds more allegations and details.

UPDATE (June 5, 16:20 UTC): Adds Binance, Binance.US responses.

Adds more detail.

UPDATE (5th June, 17:25 UTC). Adds Binance statement.

UPDATE (June 5, 18:15 UTC): Adds SEC tweet.