SEC Ties Terraform Ruling to Binance in Securities Violations and Deceptive Practice Case

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The US Securities and Exchange Commission (SEC) filed the complaint on January 3, 2023 in the US District Court for the District of Columbia. This submission emphasized parallels between its lawsuit against Terraform Labs, its co-founder Do Kwon, and its enforcement actions against Binance, Binance.US and Changpeng Zhaoformer CEO of Binance.

The SEC filing drew attention to a Dec. 28 ruling against Terraform Labs and Do Kwon by Judge Jed Rakoff. In this decision, Judge Rakoff unilaterally with the SEC, determining that specific tokens involved in the alleged Terraform fraud were securities. This is based on the fact that they are investment contracts and UST offers and sales constitute an investment contract.​​​​

The SEC emphasized the relevance of Judge Rakoff’s analysis of Terraform’s UST ‘stablecoin’ to its case against Binance’s ‘stablecoin’ BUSD, as well as Binance’s staking-as-a-service programs, BNB Vault and Simple Earn. This connection was highlighted in the January 3rd filing, suggesting that Terraform Labs’ decision could provide “additional grounds” for Judge Amy Jackson to consider rejecting Binance’s motion to dismiss.​​​​

The allegations against Binance and Zhao include management of unregistered exchanges, broker-dealers and clearing agencies; misrepresenting trading controls and oversight of the Binance.US platform; and unregistered offering and sale of securities. The SEC alleged that while Zhao and Binance claimed that US customers were restricted from transacting on Binance.com, in reality, high-net-worth US customers continued to trade on the platform. Additionally, Binance.US is supposed to be independent, but was allegedly secretly controlled by Zhao and Binance​​​​​​.

SEC Chairman Gary Gensler accused Zhao and Binance of engaging in an “extensive web of fraud” involving conflicts of interest, lack of disclosure and evasion of the law. The SEC complaint alleges that since at least July 2017, Binance.com and Binance.US, under Zhao’s control, have operated as exchanges, brokers, dealers and clearing agencies, generating at least $11.6 billion in revenue from customers in the US.

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The SEC also charged Binance with the unregistered offer and sale of BNB, BUSD and crypto-lending products, and BAM Trading with the unregistered offer and sale of Binance.US’s staking-as-a-service program. The complaint notes that Binance secretly controlled assets staked by US customers in the BAM staking program.

The Terraform Labs and Binance cases are part of a series of SEC enforcement actions in 2023 alleging platforms offered unregistered securities. These actions also include lawsuits against CoinbaseRipple, Kraken and others, indicating a broader regulatory focus on the cryptocurrency sector.

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