American financial regulators have moved against the fintech firm that held high hopes for a Bermuda base, a firm that had promised to invest millions into the island.

The US Securities and Exchange Commission have charged Binance Holdings Ltd and its founder, Zhao Changpeng, with a variety of securities law violations.

Binance operates the largest crypto asset trading platform in the world, Binance.com; US-based affiliate BAM Trading Services Inc, which, together with Binance, operates the crypto asset trading platform Binance.US.

David Burt, the Premier, hailed it an “historic” day for the island in April 2018 as he signed a memorandum of understanding with Mr Zhao and the global cryptocurrency trader in the Cabinet Office conference room.

Binance was to create 40 Bermuda jobs, at least 30 of them Bermudian and spend up to $10 million on training for Bermudians in blockchain technology development.

It was to also make up to $5 million available for investment in new Bermudian blockchain business.

Mr Burt was confident at the time the deal was “a vote of confidence in Bermuda and the leadership of this government.”

But now, among other things, the SEC alleges that, while Mr Zhao and Binance publicly claimed that US customers were restricted from transacting on Binance.com, they in reality subverted their own controls to secretly allow high-value US customers to continue trading on the Binance.com platform.

Further, the SEC alleges that, while Mr Zhao and Binance publicly claimed that Binance.US was created as a separate, independent trading platform for US investors, Zhao and Binance secretly controlled the Binance.US platform’s operations behind the scenes.

The SEC also alleges that Mr Zhao and Binance exercised control of the platforms’ customers’ assets, permitting them to commingle customer assets or divert customer assets as they pleased, including to an entity Mr Zhao owned and controlled called Sigma Chain.

The SEC’s complaint further alleges that BAM Trading and BAM Management US Holdings, Inc. misled investors about non-existent trading controls over the Binance.US platform, while Sigma Chain engaged in manipulative trading that artificially inflated the platform’s trading volume.

Further, the complaint alleges that the defendants concealed the fact that it was commingling billions of dollars of investor assets and sending them to a third party, Merit Peak Limited, that is also owned by Mr Zhao.

The complaint also charges violations of critical registration-related provisions of the federal securities laws:

• Binance and BAM Trading with operating unregistered national securities exchanges, broker-dealers, and clearing agencies

• Binance and BAM Trading with the unregistered offer and sale of Binance’s own crypto assets, including a so-called exchange token, BNB, a so-called stablecoin, Binance USD, certain crypto-lending products, and a staking-as-a-service programme

• Mr Zhao as a control person for Binance’s and BAM Trading’s operation of unregistered national securities exchanges, broker-dealers and clearing agencies

SEC chairman Gary Gensler said: “Through 13 charges, we allege that Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law.

“As alleged, Zhao and Binance misled investors about their risk controls and corrupted trading volumes while actively concealing who was operating the platform, the manipulative trading of its affiliated market maker, and even where and with whom investor funds and crypto assets were custodies. They attempted to evade US securities laws by announcing sham controls that they disregarded behind the scenes so that they could keep high-value US customers on their platforms. The public should beware of investing any of their hard-earned assets with or on these unlawful platforms.”

Gurbir S. Grewal, director of the SEC’s Division of Enforcement stated: “We allege that Zhao and the Binance entities not only knew the rules of the road, but they also consciously chose to evade them and put their customers and investors at risk – all in an effort to maximise their own profits.

“By engaging in multiple unregistered offerings and also failing to register while at the same time combining the functions of exchanges, brokers, dealers, and clearing agencies, the Binance platforms under Zhao’s control imposed outsized risks and conflicts of interest on investors.

“Those risks and conflicts are only heightened by the Binance platforms’ lack of transparency, reliance on related-party transactions, and lies about controls to prevent manipulative trading. Despite their yearslong efforts to not ‘be held accountable,’ today’s complaint begins the process of doing so.”

Filed in the US District Court for the District of Columbia, the suit alleges that, since at least July 2017, Binance.com and Binance.US, while controlled by Mr Zhao, operated as exchanges, brokers, dealers, and clearing agencies and earned at least $11.6 billion in revenue from, among other things, transaction fees from US customers.

The SEC claims that (1) with respect to Binance.com, Binance should have registered as an exchange, broker-dealer, and clearing agency; (2) with respect to Binance.US, Binance and BAM Trading should have registered as an exchange and as clearing agencies; and (3) BAM Trading should have registered as a broker-dealer. The SEC also alleges that Mr Zhao is liable as a control person for Binance’s and BAM Trading’s respective registration violations.

Opinion