Binance may not be a household name, but it has a massive presence in the world of cryptocurrencies.
And now, the company founded by the former burger flipper-turned-billionaire is engaged in a huge legal battle against Wall Street’s top cop — a battle whose outcome may well define the entire future of the crypto industry.
This summer, the Securities and Exchange Commission filed more than a dozen charges against Binance, which operates the world’s largest cryptocurrency exchange, and its founder and chief executive, Changpeng Zhao.
He is accused of misleading investors and operating an unregistered – and therefore illegal – exchange. The CEO of Binance, better known by his initials CZ, is accused of conducting an “elaborate scheme to evade US federal securities laws,” according to the SEC.
The sweeping allegation, which is being strongly contested by Binance, is part of an aggressive crackdown by the crypto industry, which hit an all-time high following the collapse of FTX last year.
In recent months, the SEC has brought a flurry of lawsuits against several companies, including Coinbase, which operates another popular cryptocurrency exchange.
With each of these actions, the agency is trying to bring crypto to heel. Gary Gensler has demanded this ever since he became chairman of the SEC.
“Right now, we don’t have enough investor protection in crypto,” he told the Aspen Security Forum in 2021. “To be honest, at this point, it’s like the Wild West.”
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Under Chairman Gary Gensler, the SEC has come down hard on crypto companies as it seeks to push the industry to comply with its rules.
Over the past few years, the SEC has become concerned with how rapidly the crypto industry has grown. Today, there are thousands of digital currencies, and crypto companies providing all kinds of services, including banking, while operating in a regulatory gray area.
The SEC under Gensler intends to change that. With enforcement actions against companies such as Binance and Coinbase, the argument is being made that most cryptocurrencies are securities – like stocks, not commodities, and therefore, fall under regulatory purview.
This claim goes against the essence of crypto. By design, it must operate outside the rules of traditional finance.
The outcome of the SEC’s lawsuits against crypto companies could have huge consequences for the industry. This would mean that virtual currencies and other digital assets could be regulated in the same way as stocks.
And perhaps nothing reflects those stakes better than the battle being waged against Binance.
A one-stop financial shop
Binance has over 140 million users worldwide who use it to buy and sell cryptocurrencies including bitcoin.
But it is not just a trading platform like Nasdaq.
“It’s really hard to overstate how important Binance is to the crypto ecosystem,” says Yasha Yadav, a digital assets expert at Vanderbilt Law School.
Today, it has a research arm and a lending business. In some countries, Binance offers a crypto debit card. And it’s also a market for risky assets like digital art and crypto derivatives.
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Binance has become massive in the world of crypto, becoming a one-stop shop for everything. This is a model that does not exist in traditional finance.
Think of Binance as a crypto Amazon: a one-stop shop for everything.
This is not a business model that exists in traditional finance, where there are massive regulations to protect investors from systemic risks and conflicts of interest.
The SEC has accused companies affiliated with Binance of trading against Binance customers. And the firm also has its own proprietary cryptocurrency, called Binance Coin, or BNB.
“It is an organization that has become a major headache for regulators,” says Yadav.
Origin of crypto
Many experts see the legal tussle between the SEC and Binance as a long one. Gensler has stated that his goal is to bring the crypto industry out of the shadows.
A longtime regulator, he headed the Commodity Futures Trading Commission – which has also filed a lawsuit against Binance during the Obama administration, and Gensler knows the crypto world well. He taught a course on digital assets called “Blockchain and Money” at the Massachusetts Institute of Technology before returning to government in 2021.
Under his leadership, the SEC is asserting that it has the authority — thanks to decades-old securities laws — to oversee an industry that is still in its infancy. Satoshi Nakamoto’s paper proposing the creation of bitcoin was published in 2008.
During Gensler’s tenure, it has filed more than 100 crypto-related enforcement actions. And although Gensler is fighting his own battles on several fronts, he and the SEC face an uphill battle. Crypto companies intend to fight to the death to avoid being regulated by the agency.
CZ, crypto evangelist
Gensler’s regulatory pressure now pits him against CZ, which founded Binance in China in 2017. The company has moved several times since then – in 2021, China banned crypto mining and crypto trading. And today, Binance proudly states that it does not have any official headquarters anywhere.
The SEC says Binance is at the helm of an “opaque web of corporate entities” and the regulator alleges this web was created by CZ, a crypto celebrity who grew up in Canada. He headlines business conferences around the world and seems happy to take on skeptics on social media.
On X, the platform formerly known as Twitter, CZ frequently accuses journalists of spreading “FUD” – fear, uncertainty and doubt – about crypto.
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CZ shakes hands with SS Lazio player Lucas Leiva during a visit to the Formello Sport Center on May 12, 2022 in Rome, Italy.
To true believers, CZ is a visionary and crypto warrior, but to Gensler, he is a dangerous impostor.
In an interview after the SEC filed the lawsuit, Gensler told Bloomberg TV that Binance customers don’t know much about what CZ and his company do with their money behind the scenes.
“We know that Mr. Zhao controls all this,” he said. “We know that investors were misled about risk controls, and that they hid much from the investing public.”
The SEC also accused CZ and Binance of funneling their assets to other CZ controlled companies and manipulating the broader crypto market.
From flipping burgers to starting Binance
Binance declined NPR’s request for an interview with CZ, but in 2021, he sat down with hedge fund manager and former White House communications director Anthony Scaramucci, who asked CZ how he got his start.
CZ was born in China and a few years later his family immigrated to British Columbia, Canada.
He recalled, “When I was 15, I was flipping burgers at McDonald’s.” “After that I also worked at a gas station.”
This is the first chapter in a crypto rags-to-riches story – the kind of story that has convinced countless first-time investors that they too can strike it rich by buying digital currency.
CZ went to college in Montreal, landed an internship at a software company in Tokyo, and has been on the rise ever since. He has lived in Asia, the Middle East and Europe, giving him a unique perspective on global finance.
He told Scaramucci, “I was living in different places, so I was never married to one currency, one country, etc.”
CZ’s itinerary helps explain what makes cryptocurrencies so attractive to him. By design, the crypto economy is borderless – created to operate outside the boundaries of traditional finance.
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Brian Armstrong, CEO and co-founder, Coinbase, speaks during the Milken Institute Global Conference on May 2, 2022 in Beverly Hills. The SEC is also suing US crypto trading platforms alleging securities violations.
life changing poker game
In 2013, CZ first heard about crypto at a poker game in Shanghai. Bobby Lee, who was then the CEO of BTC China, one of the early cryptocurrency exchanges, advised CZ to invest 10% of his money in bitcoin.
But CZ got into it. He sold everything – including his apartment, and got a rude awakening a few months later when the digital currency plummeted in price.
“All my relatives were like, ‘What?!’” he recalled. “My mother wanted to slap my head and say, ‘You’re a fool, kid.’”
But CZ persevered, and as bitcoin began to grow in value and popularity, CZ saw an opportunity to build a new trading platform that would make it easier for people to get into crypto.
A few months after launching Binance, at the Forbes conference in Singapore, CZ emphasized how much he believed in the sustainability power of crypto. He showed the audience a tattoo of his company’s logo that he had made on his arm.
“There are some people who are unsure about the future of this industry,” he said. “I’m pretty sure we’re here to stay.”
Binance becomes a crypto giant. CZ said that in 2021, $170 billion was transacted on the platform in a single day.
The company’s rise hasn’t been without controversy—there have been many of them, in fact. Binance has faced allegations that it has facilitated money laundering, and the company has been accused of having ties to China, both of which Binance disputes. A Reuters investigation concluded that, between 2017 and 2021, “Binance processed at least $2.35 billion in transactions resulting from hacks, investment fraud and illegal drug sales.”
Binance is under pressure
But the SEC lawsuit is Binance’s biggest challenge to date. And today, its future hangs in the balance.
The SEC is seeking a court order to block the company and CZ from doing business in the US, and its market share has plummeted since the agency filed suit.
Several European countries have told the company they are not welcome there, and the Department of Justice is reportedly investigating CZ and Binance, which have recently made massive job cuts. In addition, several executives have recently left the company.
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An employee demonstrates how a bitcoin ATM works at a Bitbase store on August 9, 2021 in Palma de Mallorca, Spain. Cryptocurrencies like bitcoin are starting to become more popular.
Binance says it plans to fight the SEC’s charges, calling them “unfair.” Meanwhile, CZ continues to insist that it is not entirely against crypto regulation.
He told an audience in Singapore in 2021, “I am not a complete libertarian.” “I am not an anarchist. I do not believe that human civilization is advanced enough to live in a world without rules.”
But what rules?
This is at the heart of this fight.
For years, Binance and other crypto companies have been trying to shape a new regulatory framework – one that suits them. They argue that many existing rules do not apply.
This trial will help determine if they are correct.
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