Crypto

“A decent rule of thumb,” I wrote in March, “is that all cryptocurrency exchanges are doing crimes, and if you’re lucky your exchange is doing only process crimes.”

SOL, ADA, MATIC, FIL,ATOM, SAND, MANA, ALGO, AXS, and COTI

From September 2019 through February 2023, Binance offered and sold BUSD to U.S. investors as part of a profit-earning scheme within the Binance ecosystem, touting returns for investors from simply buying BUSD or deploying it in Binance profit-generating programs.

Since its inception, BUSD has been offered and sold as an investment contract and, therefore, as a security.

Sigma Chain also engaged in wash trading on or around the time when BAM Trading made at least 65 new crypto assets, including crypto asset securities, available for trading on the Binance.US Platform. Between January 1, 2022 and June 23, 2022 alone, Sigma Chain accounts engaged in wash trading in 48 of 51 newly listed crypto assets.

Much of this wash trading occurred through numerous accounts affiliated with Sigma Chain, anentity owned and controlled by Zhao and operated by Binance employees at Zhao’s direction.

. On June 23, 2020, for example, in discussing a drop in trading volume from market makers on the Binance.US Platform, BAM CEO A asked the BAM Trading’s Sales Director to “pull [Sigma Chain’s] data to hold them accountable too . . . they should be consistent too – we can ask for more volume but they’ve been up to 50% for us before.”

Wash trading between Sigma Chain’s accounts occurred from the launch of the Binance.US Platform in 2019 through at least June 23, 2022. This wash trading activity corrupted the Binance.US Platform’s reported trading volume in a strategic pattern that coincided with at least three critical periods for crypto asset investors and the Equity Investors: (1) the Binance.US Platform’s launch in September 2019; (2) BAM Trading’s making available certain new crypto asset securities for trading on the Binance.US Platform; and (3) the months leading up to BAM Trading’s seed funding round starting in September 2021.

On January 6, 2021, the Sales Director messaged BAM CEO A and other BAM Trading employees “fyi these are ALL sigma chain,” and then listed 20 account numbers. Another BAM Trading employee responded, “whoa.”

From May 2020 to February 2022, Alameda Research, the trading firm associated with FTX founder Sam Bankman-Fried, was often the OTC Desk’s only counterparty vis-à-vis BAM Trading customers.

BAM CEO B tried to implement plans to migrate those functions and control ofthe crypto assets from Binance to BAM Trading and into the United States, but Zhao quickly overruled him, causing BAM CEO B to resign approximately three months into his tenure.

As BAM CEO A explained to the Binance CFO shortly after the article was released, BAM Trading employees “lost a lot of trust with the article” and “the entire team feels like they’ve been duped into being a puppet.”

For example, by 2021, at least $145 million was transferred from BAM Trading to a Sigma Chain account, and another $45 million of funds were transferred from BAM Trading’s Trust Company B account to the Sigma Chain account. From this account,Sigma Chain spent $11 million to purchase a yacht.

“To the extent that these two liquidity providers were significant sources of liquidity, meaning that our customers couldn’t, you know, clear orders without the presence of those makers on our platform, I thought that was a real problem. It suggested that the company was, in fact, heavily dependent on CZ, not just as a control person but also as an economic counterparty and that is problematic, so I thought we needed to look into deplatforming them.”

In addition to controlling BAM Trading bank accounts that held customer funds,at least through December 2022, Binance was the designated custodian for crypto assets deposited, held, traded, and/or accrued on the Binance.US Platform, as expressly recognized in the SLAs. Internal communications indicate that BAM Trading and Binance understood that “.com is the custodian .us uses” and “CZ control[s] the wallet.”

Similarly, in December 2020, Binance transferred $17 million from BAM Trading’s bank accounts to Merit Peak. After learning of the transfer, BAM CEO A asked Binance employees about the transaction and eventually learned that the transfer related to Merit Peak’s trading on the Binance.US Platform. BAM CEO A responded, “thanks – helpful. Just had to get explanation anytime someone breaking our limits with massive withdraw[als] I have to ask – where you get that kind of money? And where is it going? . . . haha [I’m] on a wild goose chase to make sure we have knowledge of where $17M is moving around.”

For example, in June 2020, when Trust Company B alerted BAM CEO A that BAM Trading’s internal transfers had increased from approximately $10 million per day to $1.5 billion per day, BAM CEO A had no knowledge of such transfers, was unable to verify them because she lacked appropriate account access, and, as a result, had to ask Binance (a purportedly separate and 43 distinct company) about the transfer of billions of dollars in BAM Trading’s own account.

As BAM CEO A testified, there was “significant opacity” with respect to the Binance.US Platform’s trading data, and she “did not get answers from CZ on why or how or what we would need to do to be able to bring the data over” to the United States. She “wanted custody of the data and ability to interact with the raw data in real-time, as to my directions, not waiting on someone else’s approvals,” but she never received it.

Nor did the situation change when BAM CEO A’s successor (“BAM CEO B”) assumed the role in May 2021. BAM CEO B testified to SEC staff that the “level of ... connection” between Binance and BAM Trading was a “problem” and that he had concluded that BAM Trading “need[ed] to migrate the technology to full [BAM Trading] control.”

Zhao gave final signoff on various decisions relating to the Binance.US Platform’s trading services, including customer account opening processes, development of the front-end access, and creating a reserve to cover ACH deposits.

In an internal chat in September 2019, the Binance CFO and the Binance CCO agreed that “CZ [wa]s willing to take the legal risk in listing BNB, if [they could] find a way to quantify it.” They further quantified the legal risk of listing BNB on the Binance.US Platform as “$10 mm in legal fees and settlements,” contrasted to the fact that BNB’s price could “go up 20%.” And, referring to the SEC’s June 2019 enforcement action in SEC v. Kik Interactive for the unregistered offer and sale of crypto assets as investment contracts under Howey, they noted that if a “Kik wells notice happens to BNB, BNB price can go down significantly.” The two also discussed that they would “start prepping everything” for a subpoena and Wells notice, including a “War chest.”

“[T]he best way I can think of is to onboard with US exchange ... but we let them trade on .com through a special arrangement.” He further explained, “[W]e ask them to onboard with US, and then if their volume is really very big ... we will push hard on .com side to accept it on an exceptional basis ... we always have a way for whales ... either we do it, or [a competitor crypto trading platform] does it.”

“Then if their volume is really very big we will push hard on .com to accept it on an exceptional basis ... CZ will definitely agree to this lol.” Lim continued: “but they need to really be doing sick ass volumes.”

We do need to let users know that they can change their KYC on Binance.com and continue to use it. But the message, the message needs to be finessed very carefully because whatever we send will be public. We cannot be held accountable for it.

We don’t want to lose all the VIPs which actually contribute to quite a large number of volume. So ideally we would help them facilitate registering companies or moving the trading volume offshore in some way—in a way that we can accept without them being labeled completely U.S. to us.

The Binance Consultant also recommended that Binance take steps to “reduce the attractiveness of enforcement” by U.S. regulators concerning the Binance.com Platform. This included publicly “restrict[ing] US persons’ access to the main Binance site” while privately encouraging U.S. customers to bypass these restrictions through the “strategic treatment” of virtual private networks (“VPNs”) that would disguise their locations and thereby “minimize [the] economic impact” of Binance’s public proclamations that it was prohibiting U.S investors on the platform.

As to the SEC, the Binance Consultant also recommended that, “just for publicity,” the Tai Chi entity should “release a long and detailed Howey Test Asset-Evaluation Framework ... to show Howey test sophistication” and then engage with the SEC to discuss the “formation or acquisition of a broker/dealer or alternative trading system (ATS), with no expectation of success and solely to pause potential enforcement efforts.”

Ahead of those announcements, which usually resulted in an increase in the assets’ prices, Nikhil Wahi and Ramani allegedly purchased at least 25 crypto assets, at least nine of which were securities, and then typically sold them shortly after the announcements for a profit.

The SEC is suing Gemini as regulators crack down on the industry. The exchange’s market share has shrunk versus rivals even as crypto prices have rebounded. A banking partner wants to break up. And now this month, a crucial due date on a loan — that, if repaid by its bankrupt lending partner’s parent company, could help hundreds of thousands of Gemini customers recoup some of the $900 million worth of crypto deposits trapped in its defunct Earn product — has come and gone as negotiations on a resolution drag on.

A line that said “we believe crypto will define the next few decades” was removed from the home page, which now makes no mention of web3 or blockchains.