Just a month ago, the scent of a showdown was in the air when Gary Gensler, Chairman of the U.S. Securities and Exchange Commission (SEC), expressed his distaste for Binance during an interrogation by Congress. Labeling the cryptocurrency exchange as a deceiver of customers and a circumventor of U.S. securities laws, Gensler signaled a storm brewing on the horizon.

Fast forward to today, Binance finds itself squarely in the SEC's sights. A formal lawsuit against Binance, its CEO, and associated parties has been filed, alleging severe breaches of federal securities laws. According to the SEC, these supposed violations jeopardized investors' assets and enabled the accused to unlawfully accumulate profits totaling billions.

Before diving into the lawsuit, it's important to understand how things got here...

There are some vital details that set the stage for the ensuing legal battle. This is not your regular SEC operation.

- SEC Chairman Gary Gensler is one of the most contentious leaders to date.

His leadership style significantly deviates from his predecessors, instigating a tense atmosphere between the SEC and regulated firms.

Formerly, the SEC used to handle compliance issues in a manner that fostered dialogue between enterprises and regulators. However, attempts to uphold this tradition of open communication under Gensler's leadership were met with silence. A notable point of concern is Gensler's often refusal to respond to inquiries, even when he is the sole authority capable of answering.

His silence speaks volumes when firms, after being overlooked, find themselves on the receiving end of an SEC lawsuit. "Leveraging enforcement actions to interpret law in a burgeoning industry is neither an effective nor equitable regulatory approach," argues a congressional representative.

SEC Chair Gary Gensler takes questions from Congress.

- Under Gensler we have witnessed a large number of disgruntled employees leaving the SEC, and unhappy businesses leaving the country...

Gensler's management style has been controversial, eliciting criticism from within the SEC. Commissioner Hester Pierce described his leadership as 'lethargic,' critiquing the reliance on enforcement actions for legislative interpretation in an emerging industry as inefficient and unfair.

- The most concerning illustration of the SEC's broken leadership: its interaction with Coinbase.

Despite obtaining SEC approval and listing on the stock exchange following detailed disclosure of operations, Coinbase, without any operational changes, received a Wells Notice stating an impending lawsuit for potential violations.

Essentially, after SEC approval and US investors buying hundreds of millions of dollars of coinbase stock, that stock is now at risk of the agency that approved it, now out to crash it - all with no changes in business operations since it was approved. 

*Update* - One day after this article was published the 'impending lawsuit' referenced above was executed.

- Criticized for Missing in Action When the SEC was Actually Needed - FTX Debacle Occurred on Gensler's Watch.

While firms seeking guidance were ignored, then slapped with lawsuits for violating undisclosed rules, FTX, under Gensler's supervision, ascended to be the #2 global exchange free of any interference. Ironically, the Binance CEO, now facing a lawsuit, exposed FTX's underlying fraud.

The SEC nowhere to be found as users traded assets that were non-existent or misplaced due to FTX's deficient and fraudulent accounting.

- These are not criminal charges.

The lawsuit seeks financial penalties for regulation violations. No criminal incarceration can result from the legal actions taken thus far.

- A recurring name you will see in the charges 'BAM Trading'.

Listed as the 'owner' of Binance.us, BAM Trading was purportedly created to comply with U.S. laws. However, the SEC alleges that Binance.com CEO CZ controls both Binance.com and Binance.us, implying that BAM Trading is merely a facade for Binance's U.S. operations.

Armed with this background, let's delve into the lawsuit:

The SEC accuses Binance and BAM Trading of deceptive practices, enticing U.S. investors into buying, selling, and trading crypto assets through their unregistered online platforms, Binance.com and Binance.US. The defendants are alleged to have offered unauthorized crypto asset securities, imperiling investor wealth.

The charges extend to Binance and BAM Trading's operations, helmed by Zhao Changpeng, for providing securities market services—trading, brokering, and clearing—on their platforms without SEC authorization.

Moreover, the lawsuit alleges that Binance and BAM Trading partook in illegal, unregistered offers and sales of crypto asset securities, concealing crucial investment-related information.

Another accusation centers on BAM Trading and BAM Management's deceitful promises about the Binance.US Platform's controls, while allegedly accumulating about $200 million from private investors and billions in trading volume.

The lawsuit goes on to accuse Binance of an underground operation, alleging a multi-step strategy since 2018 to evade U.S. laws. The scheme involved the establishment of BAM entities in the U.S. under Zhao and Binance's control, disguised as independent operators of the Binance.US Platform.

Furthermore, the defendants are accused of circumventing U.S. regulatory oversight while providing securities-related services to U.S. clients. The defendants also reportedly failed to implement vital trading surveillance or manipulative trading controls, leading to 'wash trading' and self-dealing on the Binance.US Platform.

The lawsuit portrays Binance and BAM Trading as willful evaders of key disclosure requirements and other investor and market protections, thereby violating the Securities Act of 1933 and the Securities Exchange Act of 1934.

Yes, 1934 is when the laws they are applying to crypto trading in the US were authored.  Many point out 'that's decades before blockchain tech was invented' - I point out that color TV's were still 20 YEARS away.

Binance Vows to Stand Its Ground...

As this report was in preparation, both Binance.com and Binance.US responded.

Binance.US's response emphasized that "the lawsuit is baseless, and we intend to defend ourselves vigorously." The full statement is available on their Twitter account.

Binance.com denounced the SEC's actions on their website, asserting the SEC has "zero justification" to suggest customer assets were at risk. They stated that instead of engaging in a productive dialogue about the platform's safety and security, the SEC preferred to "make headlines."

CEO and Founder of Binance 'CZ' also took to Twitter, sarcastically polling "Who protects you more?" between the SEC and Binance—with Binance has an 85% lead, but obviously this isn't an accurate polling method. He also retweeted the SEC Chairman's lawsuit announcement, provocatively asking "Wonder if he ever reads the comments under his post, from the consumers he is suppose to protect?" 

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Author: Mark Pippen
London News Desk | Breaking Crypto News

Binance says they were able to recover about $5.8 million worth of the stolen crypto that made its way onto its platform, originally taken from the Ronin Network/Axie Infinity bridge security breach that occurred at the end of last month, the original story is here.

Last week, the  U.S. Treasury Department identified North Korean hacking group 'Lazarus' as the attackers behind the theft.

Immediately after the theft occurred resources were deployed to follow every step the stolen coins would make...

The thieves attempted to use tornado.cash, a service that aims to make transactions that go through it private by breaking the chain of custody, they explain their service "uses a smart contract that accepts ETH deposits that can be withdrawn by a different address" and suggest the longer users wait to withdraw the funds they hold, the harder it becomes to link the person withdrawing to the original deposit.

This wasn't enough to hide their tracks, "We coordinated with industry leading blockchain analytics firms and immediately froze the funds when exposure to our platform was identified" a spokesperson for Binance said. 

We believe Chainalysis is the analytics firm they're referencing, as we know they've worked closely with Binance on legal compliance and anti-fraud issues for years, they also develop software specifically for the purpose of following tokens through transactions intended to hide their trail.

According to Binance CEO 'CZ' they also discovered 86 fraudulent accounts by following these funds. 

A Small Part Of The Massive Total...

The theft totaled more than $600 million in cryptocurrency, so recovery of just $5.8 million isn't even 1% of the total taken..  

But this was just the first battle in what will be an ongoing war, that we're now learning more about.

A Target On Them Every Second, of Every Day...

Speaking 'unofficially' with a cyber security coordinator from another top exchange (who requested to remain unnamed) the industry is taking an ultra-aggressive approach to dealing with the issue of hacks and ransomware that target or use cryptocurrencies.

"The coins are being watched by software that doesn't lose track of them just because they've been shuffled around and split up countless times before attempting to cash out" he explained "as soon as one of the firms monitoring these flagged coins sees them being transferred to an exchange capable of turning them in to cash - if we're that exchange, our phone is ringing seconds later. Someone capable of immediately freezing those funds will actually be there to answer it 24/7".

This coordination between organizations has one main goal "we want people from that world to see crypto as the worst, most headache-inducing way to do business" specifically regarding this latest theft, he added "I can imagine the celebrating these crooks did when they believed they had stolen $600 million.  Then I imagine these next few months, failing again and again to get their hands on it - unintentionally returning it to their victim.  At some point they'll need to evaluate how much time they've wasted for these $0 paydays."

We ended our conversation with him making a rather bold prediction "No joke - in the near future I see the scammers, hackers, thieves, hostile governments and whoever else may be from that world of illegitimated earnings demanding 'NO CRYPTO!' because we've made doing their business in crypto such an awful, stressful experience".

That's Exactly How it Continues to Play Out...

The thieves 'awful, stressful experience' continues as the US Treasury Department adds three more addresses to its list of blacklisted wallets connected to the Ronin Network hack.

Vowing to continue the "disruptive action against entities facilitating the movement of the stolen virtual currency" and calling on the crypto industry to "lock its digital doors" leaving the thieves with hundreds of millions of dollars... that are impossible to spend. 

Chainalysis recently released a completely free tool that any company or organization can easily integrate into whatever service they provide, allowing them to automatically check wallet addresses they or a user are transacting with are not on the blacklist of wallets involved in various illegal activities.

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Author: Ross Davis
Silicon Valley Newsroom
GCP | Breaking Crypto News