The Securities and Exchange Commission (SEC) is probing Binance’s US-based exchange over its relationship with two market makers, both of which are allegedly controlled by Binance chief exec Changpeng Zhao.
According to former Binance execs, Zhao has been heading up trading shops Sigma Chain and Merit Peak since at least late 2021, reports the Wall Street Journal (WSJ).
Sigma Chain’s corporate documents list Changpeng Zhao as executive director as of September 2019, and while very little information about Merit Peak is publicly available, documentation indicates that it bought a stake in Binance.US in 2019.
At least one of those documents has Changpeng Zhao’s signature on it. The SEC even referred to Merit Peak as a Binance entity in a December 2020 subpoena.
Corporate documents from 2019 also suggest that Zhao controlled both Sigma Chain and Merit Peak.
Both companies trade crypto on Binance.US, while Sigma Chain also builds enterprise blockchain solutions and provides advisory services for businesses interested in adopting blockchain.
SEC wants Binance to be a level playing field
Binance.US previously admitted that affiliated companies may trade on its exchanges and the SEC alleges that Sigma Chain carried out most of its trading activity on Binance.US.
This is where principals like Zhao make a profit, taking advantage of small price differences in order books.
But the SEC prohibits giving affiliated market makers an unfair advantage on an exchange.
- In 2015, Investment Technology Group paid a $20.3 million SEC fine over similar allegations.
- The firm admitted to running a dark pool through which affiliates could trade against customers on its main exchange.
- Major liquidity provider Virtu Financial later acquired the company.
SEC Chairman Gary Gensler told Fox Business that the SEC normally cannot comment on active investigations but will take steps to protect investors from unfair manipulation.
If the digital assets traded on exchanges like Binance.US are securities, then the SEC can claim jurisdiction.
Gensler also previously expressed concern that the crypto ecosystem resembles the “Wild West” and alleged that the asset class still sees more than its fair share of “fraud, scams, and abuse.”
In January, CZ pushed back against allegations of regulatory violations, particularly in relation to weak anti-money laundering checks.
Leaked documents had just indicated that its regulatory compliance team warned of widespread negligence.
Binance spokesperson Stephen Milton said that Binance is not required to publicly release corporate structure information.
He claimed that Binance shares information with regulators as required. So here it is, sharing information in response to this recent probe over potential market nepotism.
A market-making founder? Sounds a lot like FTX
Privately-held Binance competitor FTX, run by 29-year-old crypto billionaire Sam Bankman-Fried, has similarly denied requests for information from the public.
Just as Binance founder Zhao was an executive at a market maker trading on his own exchange, so was FTX chief Sam Bankman-Fried via Alameda Research.
Bankman-Fried says his market maker-slash-quant shop Alameda has the same access as any other account and makes up only a small fraction of FTX’s trading volume.
Coinbase Global, on the other hand, flat out denies having any affiliated market makers, although the company has been caught wash trading amongst its own algorithms before.
The SEC previously investigated Binance for allegedly allowing US traders to use its flagship global exchange without a license.
Binance’s global offering lists hundreds of cryptocurrencies and derivatives, as well as leverage.
Its US exchange serves far fewer assets and claims to blocks US residents, instead steering them toward its regulated platform.
Indeed, Binance has frequently faced conflict with regulators. It left China and briefly considered making a home in Malta soon after its founding in 2017 due to opposition from the Chinese government.
During China’s latest crackdown in late 2021, Binance suspended most users in mainland China and delisted the Chinese Yuan.
It claims to be registered in the Cayman Islands but currently does not have a permanent headquarters and a Cayman Islands financial regulator says that the exchange has not obtained a license to operate in the country.
Some observers speculate that Binance might form a permanent global base in the United Arab Emirates or Bahrain after Zhao bought an apartment in Dubai and associated in public with Bahraini leaders.
If successful, the SEC’s latest probe may shine light on potentially unfair trading practices overseen by Zhao as he amassed his fortune to pay for all that.
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