The US Securities and Exchange Commission (SEC) has accused Binance, the world’s largest crypto exchange, and its CEO, Changpeng Zhao, of lying to regulators, according to a federal suit filed on Monday (5 June).

In a court filing, the SEC stated that the defendants had “engaged in multiple unregistered offers and sales of crypto asset securities and other investment schemes.”

The SEC’s complaint alleges that Zhao and Binance created entities, BAM Management and BAM Trading, in September 2019 as part of an elaborate scheme to evade US federal securities laws. The SEC claims that BAM Trading operated Binance’s US operations on an independent platform and that US customers were not able to use the platform.

Binance and BAM Trading were accused of failing to register with the SEC whist operating under Zhao’s leadership and control.

The SEC stated that Binance had mixed “billions of dollars” in customer funds, which allegedly were sent to a separate company under the control of CEO and founder Zhao.

“We allege that Zhao and the Binance entities not only knew the rules of the road, but they also consciously chose to evade them and put their customers and investors at risk,” Gurbir Grewal, director of the SEC’s enforcement division said.

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By GlobalData

When FTX collapsed in November 2022, Binance took its place as the top worldwide crypto exchange. The year before the collapse investment in crypto peaked to close to $20bn, dropping to $13bn in 2022, according to GlobalData.

The effect of the accusation by the SEC towards Binance has already been felt keenly by investors. On Tuesday, Bitcoin fell more than 5%, its worst daily decline since 19 April, Reuters reported.

If Binance is shown to be flouting regulation, investor confidence in crypto it expected to reach an all time low.

National regulators have taken varying approaches to the regulating and implementing of cryptocurrencies.

The EU has been keen to position itself as a digital asset hub, as shown by the European Commission’s ground-breaking crypto regulatory framework proposals. France has been especially accommodating to Binance, granting the exchange a Digital Asset Service Provider (DASP) registration by France’s financial regulator the Autorité des Marchés Financiers (AMF).

Dubai has also been a leader in its implementation of crypto. In February 2022, the emirate announced a regulatory framework for virtual assets including cryptocurrencies.

While total venture capital investment in crypto and blockchain start-ups exceeded $30bn in 2021, according to Gemini’s 2022 Global State of Crypto report, the collapse of FTX threw up major concerns about the volatility of crypto assets.

In January, the Board of Governors of the Federal Reserve System put out a statement saying due to poor oversight crypto-asset companies are a “contagion risk” for banks. 

Investors will now be watching Binance as the leading global crypto exchange to see if the US regulators concerns are well-founded.