Crypto exchange Binance has another regulatory monster to fight: the U.S. SEC

The US Securities and Exchange Commission (US SEC) has launched a fresh inquiry into Binance.US on market makers trading affiliations.
The US SEC has launched an inquiry into Binance. U.S. Credit: Binance

Key Takeaways

  • Binance US, the subsidary of the giant exchange, is under the scrutiny of the US SEC again
  • The SEC is probing the relationship between Binance CEO Changpeng Zhao and two trading firms.

YEREVAN (CoinChapter.com) — Binance, the largest cryptocurrency exchange by volume in the world, has come across another monstrous regulatory scrutiny, this time by the top securities watchdog: the U.S. Securities and Exchange Commission (SEC).

A report published by the Wall Street Journal shows that the SEC has launched an inquiry into Binance.US, the U.S.-based subsidiary of the exchange.

The U.S. regulator has reportedly probed the relationship between Binance CEO Changpeng Zhao, Sigma and Chain AG, and Merit Peak Ltd. The watchdog intends to determine the extent of the relationship between Binance.US and the two trading firms. Zhao has been allegedly leading both the companies, considered to be marker-makers.

In detail, both Sigma Chain AG and Merit Peak regularly buy and sell crypto on Binance. The U.S. Their supposed job is to help reduce price volatility. However, since the companies under scrutiny are market makers, the SEC wants to determine how Binance.US may have taken advantage of its connection with the two companies.

Does a huge fine await Binance if found guilty? 

If the SEC finds Binance.US guilty of market malpractices, the exchange will likely shell out a lump some fine. Back in 2015, the SEC announced that ITG Inc. and its affiliate AlterNet Securities had agreed to pay $20.3 million to settle charges. The ITG was allegedly operating a secret trading desk and misusing the confidential trading information of dark pool subscribers.

In and by themselves, market makers are an integral part of the trading system. They prevent high volatility and market crashes by backing platforms and injecting cash into the markets at critical times. 

However, the SEC expects trading platforms to disclose any affiliation to market makers. As per the ongoing probe, Binance US may have flaunted this rule.

The SEC has adopted new rules addressing the selective disclosure of material nonpublic information. Regulation Fair Disclosure, in particular, is one such rule that addresses selective disclosure. 

The regulation provides that when an issuer, or person acting on its behalf, discloses material nonpublic information to certain parties who may well trade based on the information, it must make public disclosure it.

“When selective disclosure leads to trading by the recipients of the disclosure or trading by those whom these recipients advise, the practice bears a close resemblance to ordinary “tipping” and insider trading. The economic effects of the two practices are essentially the same; in both cases, a few persons gain an informational edge — and use that edge to profit at the expense of the uninformed,” 

the SEC argues.
Also Read: Binance bans Nigeria — but does it matter for the emerging crypto nation?

Crypto and securities

Although the SEC will be looking to make a good case for itself, fining Binance US may prove to be a tough task. 

To charge Binance US with any irregularities, the SEC has to demonstrate that some of the tokens traded on the platform come under its regulations. However, the SEC has only declared Initial Coin Offerings (ICOs) as securities. With no clarity about which crypto fits under its definition of securities, the SEC will have a tough time making a strong case for itself.

Meanwhile, Binance US has every reason to be worried. 

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Binance, Crypto exchange Binance has another regulatory monster to fight: the U.S. SEC

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