SEC sues Binance, part 2: asset freeze, securities, Coley and Brooks, Gensler’s alleged COI

By Amy Castor and David Gerard

• ONE WEIRD TRICK they don’t want you to know: Send us money! Here’s Amy’s Patreon, and here’s David’s. Sign up today!
• Our patrons can also get a couple of “Bitcoin: It Can’t Be That Stupid” stickers just by messaging one of us and asking.
• David has signed author copies of his books for sale.
• Sign up on Amy’s blog to see every new post she makes as it goes up, and click here and enter your email address for every new post on David’s blog as it goes up.

“please don’t joke about this, a byzantine general stole my life savings” — owen_needs_tea

 

 

In our last episode, we introduced the SEC complaint against Binance, BAM Trading (Binance.US), and Binance’s founder, Changpeng Zhao (“CZ”); the “Tai Chi” plan; the SEC’s proposed asset freeze; and how the Binance money funnel works. But there’s so much more! [case docket]

Binance responds to the SEC’s proposed Temporary Restraining Order

The current action in the case is the SEC’s proposed TRO to freeze Binance.US assets and keep CZ from moving the customers’ money and cryptos outside the US.

Binance thought it would insulate itself from regulators by launching Binance.US. But it did the opposite — it opened Binance up to federal regulation. The SEC now wants Binance’s accounting info — for .com as well as .US.

The SEC specifically mentions Key Vision Development — a shell entity that Binance used for years to gain access to the US banking system and only lost in the collapse of Silvergate and Signature. If the SEC gets its way, Binance.com may have no other way to access US banking.

Binance Holdings Limited and BAM Trading (who run Binance.US) responded to the SEC’s proposed TRO and asset freeze. The facts are bad — so BAM pounds the table, asking why the SEC didn’t bust them before if they were doing something illegal, and that the SEC hasn’t defined which digital assets are securities.

You may have trouble finding good arguments if one of your subheadings is “The Allegedly Manipulative Trading Identified by the SEC was Entirely Appropriate.” [Doc 40, PDF]

BAM filed over 100 exhibits, most of which are trash — press clippings, web page printouts, and documents the SEC had already submitted. There might be interesting stuff in there if you go diving into the docket. BAM also submitted a proposed order of their own. [Doc 41-8, PDF]

BAM’s response does confirm that CZ “resides in the UAE.”

It looks like BAM proposed a consent order on how it handled US customer assets just before the SEC complaint was filed. The SEC was apparently ready to accept this proposal — but only if BHL and CZ signed on. They refused to — so the SEC proposed the apocalyptic version.

But this left Judge Amy Berman Jackson thinking there was room to negotiate a consent degree so they could all spend time on the actual case — and so she wouldn’t be dealing with endless appeals just on the order. (She wasn’t so thrilled by 4,000 pages of exhibits either.) Here’s the rough transcript of Tuesday’s hearing, if you’re curious. [Transcript, PDF]

BAM, BHL, CZ and the SEC are now negotiating a consent order — rather than a restraining order — to restrict BAM and BHL’s use of Binance US customer funds. [Doc 68, PDF]

Update: We have an agreed order, uploaded around 10pm Eastern on Friday night. [Proposed order, PDF] Update 2: Judge Jackson has signed off on it. John Reed Stark explains how this is extremely strong for an SEC consent order. [Doc 71, PDF; Twitter]

Catherine Coley and Brian Brooks: What we did on our holidays

Catherine Coley was the first CEO of Binance.US, hired in 2019. She stepped down abruptly in April 2021 and disappeared from social media — and kept silence to the point where people wondered what had happened to her. Coley lawyered up and resurfaced only after the CFTC lawsuit against Binance.

Quite a few documents from Coley seem to have found their way to Reuters over the past year — and the SEC has gotten hold of her internal communications with Binance, in which she questioned large money flows in and out of Binance.US accounts where she had no idea where the money was coming from or going to. [Reuters, 2022]

Coley also testified to the SEC, who published portions of her testimony as evidence of the weird things going on inside Binance.US. [Doc 20-6, PDF]

In March 2021, CZ decided to fire Coley and replace her with Brian Brooks, who started in May.

Brooks previously worked at the Coinbase crypto exchange, then served as acting head of the Office of the Comptroller of the Currency, which regulates federal banks and credit unions.

During Brooks’ 10 months at the Trump-era OCC, the bureau issued guidance that federally chartered banks could custody crypto, use blockchain-based payment systems and even issue their own stablecoins — pumping crypto so hard that Congressional Democrats asked Brooks just what he thought he was doing.

Fortune wrote up the Brooks OCC’s misadventures in crypto banking and how Brooks’ successor Michael Hsu wound back Brooks’ nonsense. [Fortune; House, PDF, archive]

Brooks’ condition for accepting the Binance.US role was to be able to run BAM himself, independently of CZ and Binance.

This was not going to happen — per the complaint, Binance “exerted and would not relinquish substantial control over BAM Trading and the operation of the Binance.US Platform.”

Brooks thought the greatest risk to BAM was that they were “highly dependent on a bunch of technology that sits in Asia.” Brooks tried to bring these technical functions into the US — but CZ overruled him.

Brooks resigned after 80 days in the job. As he told the SEC, “what became clear to me at a certain point was CZ was the CEO of BAM Trading, not me … as soon as I realized that, I left.” [Doc 20-3, PDF]

Brian Shroder took Brooks’ place as the next sucker in line for the job of CZ’s US puppet on a string.

Securities offered for trading on Binance.US

The SEC has stated that SOL (Solana), ADA (Cardano), MATIC (Polygon), FIL (Filecoin), ATOM (Cosmos), SAND (The Sandbox), MANA (Decentraland), ALGO (Algorand), AXS (Axie Infinity), and COTI are securities.

Several of these were also claimed to be securities in the Coinbase complaint — the ones only in this complaint are ATOM, ALGO, MANA, and COTI.

The SEC only has to show that one of these constitutes a security under the Howey test. But it works through all of them, just to be sure.

Thus, Binance.US was offering “exchange, clearing agency and brokerage services to US customers for crypto asset securities, without being licensed to do so and with the securities being unregistered.”

This isn’t a minor matter, any more than it was in the Coinbase or Bittrex complaints. These functions are kept separate because there’s too much potential for conflicts of interest — where the exchange trades against its own customers.

The complaint notes that two Binance companies, Merit Peak and Sigma Chain, were frequently the customers’ counterparties — so Binance literally was trading against its own customers.

Securities promoted by Binance

Binance offered its own securities, “BNB, BUSD, BNB Vault, and Simple Earn,” per the complaint.

Binance offered BNB in an ICO in 2017. They were explicit that they were raising funds to launch Binance — this was a straight-up unregistered penny stock. The white paper repeatedly called ICO buyers “investors” and talked about CZ’s management expertise.

In September 2019, CZ directed that Binance.US had to offer trading in BNB — even though it was blitheringly obviously a security under the Howey test. (David had thought in July 2019 that there was no way Binance would be that foolish.)

Coley — who was partially paid in BNB — didn’t want to offer BNB on Binance.US, but CZ overruled her. He knew it would likely cause problems, but he figured the profit outweighed the risk:

In an internal chat in September 2019, the Binance CFO and the Binance CCO agreed that “CZ [wa]s willing to take the legal risk in listing BNB, if [they could] find a way to quantify it.” They further quantified the legal risk of listing BNB on the Binance.US Platform as “$10 mm in legal fees and settlements,” contrasted to the fact that BNB’s price could “go up 20%.”

BUSD is a dollar stablecoin — but Binance sells it to investors as the ticket to various investment schemes. Binance would tell buyers that they would make money simply from buying BUSD or from putting it into Binance yield programs:

Binance has, from the outset, marketed BUSD’s profit-earning potential and referred to the various “APYs” (annual percentage yield) that investors may earn with respect to their BUSD holdings.

This might seem a stretch — but when the SEC sued Terraform Labs in February 2023, it made a similar claim that UST was marketed as the required ticket to invest in the Anchor Protocol, and so was part of the investment scheme as it was promoted.

Other schemes were:

• Simple Earn, which would “pay interest to investors who lend their crypto assets to Binance for fixed or flexible lengths of time … 15% APR for participants in the BUSD-specific Simple Earn product, and 10% in the Simple Earn product for another crypto asset”;
• BNB Vault, a “BNB yield aggregator” in which you could lend your BNB to Binance and get “One-Click Earning for Your BNB Holdings”;
• Binance.US (BAM Trading) offered managed blockchain staking as a service.

All of these are incredibly obviously securities under the Howey test.

Gensler and the alleged conflict of interest

Binance Holdings Limited (Binance.com) wrote to the SEC on June 4, begging the SEC not to freeze Binance.US funds. [Doc 19-14, PDF]

The fun bit is that BHL claims in this letter that SEC chair Gary Gensler has a conflict of interest in acting against Binance.

Before Gensler took up the reins at the SEC, he apparently spoke to CZ, including getting CZ to speak to his blockchain course at MIT.

BHL claims that Gensler “offered to serve as an advisor to BHL” — which we find implausible. Amy has interviewed Gensler in the past and found him to be as careful a speaker as you would imagine. He would have known the SEC job was already in the air.

BHL demands:

Mr. Gensler should have been recused from any consideration in this matter based on this history and the prospect that Mr. Gensler may be a material fact witness. To date, the Staff has never confirmed whether Mr. Gensler has recused himself, and if he has not, the Commission’s explanation for why not.

Do they expect this is some sort of get-out-of-SEC-action-free card?

This is at best a PR move. Its audience is the suckers and any remaining pet politicians. If they bring this claim up in court, we don’t think Judge Jackson will have patience for it.

Other good news for Binance

US dollar deposits seem to have been stuck on Binance.US since June 9. Binance.US notified customers that it was losing all US banking by June 13 and that their USD deposits might be converted into unspecified stablecoins. It’s not clear this conversion has happened yet — have any Binance US customers seen this happening yet? [Twitter]

Binance.US’s erstwhile payments processor Wyre has finally shut down for real, owing to “market conditions” and “not due to any regulatory agency direction.” Okay. [Web 3 Is Going Just Great; Twitter]

Customers of Binance Australia were dumping their BTC at a discount in late May as they rushed to get their funds off the exchange. After June 1, traders were no longer able to withdraw AUD to their bank accounts using Australia’s PayID service. [Bloomberg]

Binance has asked Cyprus to withdraw its Crypto Asset Service Provider license, apparently so it can ready itself for MiCA going into force in the EU. They totally didn’t get kicked out, okay? Binance got its CASP license last October for spot trading, custody, staking, and card services in Cyprus. [CoinDesk]

There will be no more Binance in the Netherlands as of July 17 as it’s been refused a license after multiple applications. Binance was fined 3,325,000 EUR by De Nederlandsche Bank in July 2022 for operating without a license. [NU, in Dutch]

Binance Nigeria has been ordered to cease operations. “Binance Nigeria Limited is neither registered nor regulated by the Commission and its operations in Nigeria are therefore illegal … Binance Nigeria Limited is hereby directed to immediately stop soliciting Nigerian investors in any form whatsoever.” [SEC Nigeria]

A fifth of Binance’s 8,000 staff were laid off in late May. Binance responded to news reports of the layoffs by saying it’s just dropping a few employees who “might not be performing well or who might not be the right cultural fit” as part of a “talent density audit.” Fifty staff at Binance.US just got laid off a couple of days ago. [Twitter; The Block; Unchained; Reuters]

Binance seems to be positioning Richard Teng to replace CZ as CEO at some point. Teng was recently promoted to regional head of all Binance markets outside the US. He previously worked for the Monetary Authority of Singapore, the Singapore stock exchange, and Abu Dhabi Global Market. [Bloomberg]

Molly White writes about the Binance and Coinbase suits for Rolling Stone, with a few quotes from David. [Rolling Stone]

Next episode

It looks like we’re going to a part 3 just on this one SEC complaint and its many, many exhibits. Here’s part three!