Earlier this month, the Securities and Exchange Commission (SEC) filed charges against the parent companies of Binance.com and Binance US, plus their founder, Changpeng Zhao (CZ). The charge is similar to the SEC’s December 2022 civil action against the parent companies of FTX and its founder Sam Bankman-Fried (SBF).
In both lawsuits, the SEC alleges the unregistered offering of securities to US residents.
- Binance never registered its namesake tokens — BNB and BUSD — nor its various interest-earning products with the SEC.
- FTX never registered various crypto asset securities that it listed for US trading, including Solana (SOL), Algorand (ALGO), Cardano (ADA), and many others.
The SEC also alleges that Binance.com secretly controlled some assets and operations of Binance US. FTX.com also secretly controlled the wallets used to hold FTX.US customers’ digital assets.
Binance and FTX both borrowed the banking relationships of non-exchange entities controlled by the founder to facilitate fiat deposits into the exchange.
Binance occasionally instructed depositors to wire funds to Merit Peak, a hedge fund controlled by CZ. According to the SEC, “billions of US dollars of customer funds from both Binance Platforms were commingled in an account held by a [CZ] controlled entity called Merit Peak Limited.”
FTX, on the other hand, occasionally instructed depositors to wire funds to Alameda Research, a hedge fund controlled by SBF.
Both companies created special entities specifically for US residents and claimed to disallow them from using the international exchange. However, both companies secretly encouraged high-volume US traders to bypass these restrictions and use the international exchange.
Binance created Binance US yet encouraged its wealthiest American customers to trade with the international exchange. According to the SEC, Binance’s “VIP Handling document instructed Binance employees to make sure the US customers opened new accounts ‘with no US documents allowed’ and to inform the customer ‘to keep this confidential.”
Similarly, FTX created FTX US but encouraged its wealthiest American customers to trade with the international exchange.
Binance and FTX chiefs both controlled trading companies
Binance founder CZ controlled two trading firms that traded on Binance: Merit Peak and Sigma Chain. According to the SEC, “from at least September 2019 until June 2022, Sigma Chain, a trading firm owned and controlled by [CZ], engaged in wash trading that artificially inflated the trading volume of crypto asset securities on the Binance.US Platform.”
FTX founder SBF controlled Alameda Research, the largest trading company on both FTX.com and FTX.US.
Both companies promised to segregate customer assets from corporate funds. In reality, both companies commingled customer and corporate funds.
Indeed, according to the SEC, “billions of U.S. dollars of customer funds from both Binance platforms were commingled in an account held by a CZ-controlled entity.”
SBF commingled customer assets with FTX’s corporate funds. According to the SEC, SBF “directed FTX to have customers send funds to North Dimension in an effort to hide the fact that the funds were being sent to an account controlled by Alameda. Alameda didn’t segregate these customer funds, but instead commingled them with its other assets, and used them indiscriminately to fund its trading operations and SBF’s other ventures.”
Both founders also used their proprietary tokens to prop up the corporate balance sheet of their exchange. CZ promoted BNB while holding tremendous quantities of BNB and BNB-dependent assets. During Binance’s inaugural year, CZ used Binance’s operating profits to buy back and burn BNB, rewarding token holders with a reduced supply.
Similarly, SBF consistently promoted FTT. According to the SEC, “FTX carried significant exposure to FTT, as the token was, among other things, posted as collateral for billions of dollars that FTX had loaned to Alameda to engage in speculative investments.”
To be fair, the two exchanges do have differences. The circumstances surrounding the respective civil charges by the SEC are unique, and the charges against both companies and their founders are distinct. Most importantly, FTX is currently bankrupt while Binance is still operational.