The US Securities and Exchange Commission (SEC) is reportedly looking into the relationship between the US division of Binance, the world’s largest digital asset exchange, and two trading companies with alleged ties to Binance founder Changpeng Zhao or “CZ”, according to sources familiar with the matter (and cited by the WSJ).
The trading companies, Sigma Chain AG and Merit Peak Ltd., serve as market makers that trade virtual currencies on the Binance.US exchange. A key area of focus for regulatory authorities is how Binance.US disclosed to clients its links to the trading companies, the sources said.
On its official website, Binance.US stated that affiliated market makers can trade on the exchange, however, the company did not mention which companies can do so.
The SEC reportedly requested additional information regarding these two entities from Binance.US, which is Binance’s U.S. affiliate and is currently the subject of an ongoing enforcement-related investigation, the sources confirmed.
SEC Chairman Gary Gensler recently told Fox Business (on Tuesday during “The Claman Countdown” with host Liz Claman) that he can’t discuss individual cases.
However, Gensler did share the following statements:
“Most of the activity in this asset class – as you said, $2 trillion – is happening on centralized exchanges or lending platforms. And you saw yesterday we had an announcement that I can speak about with regard to one of the large lending platforms. And why does it matter? 95% of the activity is happening there. What’s important is investors get basic investor protection protections against fraud and manipulation. And as many of the tokens on these platforms may well be securities, that’s where the Securities and Exchange Commission comes in.”
Gensler also commented on the $100 million settlement between the SEC and the 32 US states and BlockFi Lending LLC regarding the firm’s failure to appropriately register offers and sales of its retail cryptocurrency lending products, along with certain violations of the Investment Company Act of 1940.
The SEC stated that the firm started marketing BlockFi Interest Accounts (BIAs) to the public in March 2019. This is where investors had been lending digital assets to the firm in exchange for its commitment to offer a monthly interest payment (amount varied based on market conditions).
Gensler continued:
“[BlockFi] entered into a settlement arrangement to [register] so in a timely way. And importantly, what we found there is that not only was it not complying with what’s called the 1933 Act or registration, but also the Investment Company Act of 1940, offering the public returns by pulling those assets and investing those assets, the crypto assets. And what we’re working with them, we’re trying to see if we can get this whole area, these crypto exchanges, and lending platforms inside and investor protection envelope.”
Gensler added:
“And then, if the public wishes based upon not to invest or even to speculate, that’s up to the public. But to have the basic protections of protect against fraud, manipulation – to have disclosure – these are the things that we have in our stock markets and [are] really important if this technology is going to go anywhere.”