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The Securities and Exchange Commission (SEC) took legal action on Monday against Binance, the leading global cryptocurrency exchange. The SEC lawsuit, filed in federal court in the District of Columbia, also includes Changpeng Zhao, Binance's founder, and controlling shareholder, as a defendant.

The SEC alleges that Binance operated an illegal trading platform within the United States and mishandled customers' funds. 

Binance, founded in 2017, has become the largest cryptocurrency exchange in the world. It has consistently dominated the market, accounting for over 40% of all crypto trading. At times, Binance's control over trading has exceeded two-thirds of the marketplace.

 This makes the SEC's actions more significant given the exchange's size and influence.

According to the SEC, Binance and Zhao misused customer funds by diverting them to a trading entity controlled by Zhao called Sigma Chain. 

The SEC claims that Sigma Chain engaged in manipulative trading practices to inflate Binance's trading volume artificially. Furthermore, Binance allegedly concealed billions of dollars in customer assets by commingling them and sending them to a third-party company, Merit Peak, which Zhao owned.

The SEC's court complaint emphasizes Binance's blatant disregard for federal securities laws and investor protections.

Kurt Gottschall, a former head of the SEC's Denver office and partner at Haynes and Boone LLP, stated, "This will be a landmark case. The SEC appears to be very concerned about the commingling of customer funds." 

This lawsuit is not the first regulatory challenge Binance has faced in the United States. 

Last year, The Wall Street Journal reported that the SEC had been investigating Binance's relationship with Sigma Chain and Merit Peak. The Commodity Futures Trading Commission (CFTC) accused Binance and Zhao of evading its rules governing platforms offering derivatives to American traders. 

The Justice Department is also conducting an investigation into Binance's anti-money laundering program.

SEC lawsuit 

The SEC's complaint seeks to freeze Binance's assets and appoint a receiver to oversee the company. Receivers are typically independent professionals tasked with safeguarding users' assets in cases involving fraud or when regulators doubt a company's ability to comply with the law.

Gary Gensler, SEC Chair, stated, "Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law." Binance denies the allegations, asserting that user assets are safe and secure on its platforms.

Changpeng Zhao, the majority owner of Binance and Binance.US, is a prominent figure in the crypto industry. Although Binance.US was portrayed as an independent entity, it was deeply intertwined with the global exchange, sharing staff, finances, and an affiliated entity for cryptocurrency transactions.

The SEC's lawsuit also puts a spotlight on Binance's lack of controls to prevent manipulative trading practices, such as wash trading. Wash trading involves users executing both buy and sell orders to create artificial volume and manipulate prices. And it was still in play on Binance.US as recently as January 2021.

The SEC's decision to sue Binance is a significant step in asserting its jurisdiction over the crypto industry. This move follows the SEC's lawsuits against other crypto exchanges, including Bittrex, and its intent to take enforcement action against Coinbase, the largest U.S. crypto exchange.