Cryptocurrency exchange Binance, one of the world’s largest digital asset platforms, is facing serious allegations of misleading U.S. lawmakers regarding its business practices. The allegations have come to light in the wake of a recent lawsuit filed by the Securities and Exchange Commission (SEC) against Binance’s global entity and its American unit.
Lying to Congress: Senators Call for Investigation
In March, three U.S. senators, led by Elizabeth Warren and Chris Van Hollen, sent a letter to Binance’s CEO, Changpeng “CZ” Zhao, and Binance.US CEO, Brian Shroder, raising concerns about the exchange’s operations and requesting balance sheets. The senators accused Binance and its American arm of attempting to evade local regulators, bypass sanctions, and facilitate money laundering. Binance’s response to these allegations may have misled lawmakers, as revealed in a letter sent by Binance chief strategy officer Patrick Hillman to Congress.
The recent SEC lawsuit against Binance claims that the exchange’s global entity and American unit were commingling funds, blurring the lines between the two entities. This commingling of funds raises concerns about regulatory jurisdiction and liability. If Binance.US is not kept independent from its global unit, U.S. regulators could argue that Binance’s global entity acted through the American arm, thereby subjecting it to their jurisdiction. Additionally, if Binance.US were to face bankruptcy, the owners of Binance’s global unit would be responsible for its debts.
Implications of Independence and Liability
The independence of Binance.US from its global unit is crucial for regulatory compliance and limited liability. Syracuse University law professor Jack Graves explains that keeping the two entities independent prevents U.S. regulators from asserting jurisdiction over the global unit. Moreover, if Binance.US were to go bankrupt, Binance’s global unit would not be obligated to cover its debts. This principle ensures that the corporate veil provides limited liability protection to the owners. However, if funds were commingled, the owners would be liable in the event of bankruptcy, potentially exposing Binance’s global unit to significant financial risks.
In response to the SEC lawsuit, Binance’s global unit claimed to have cooperated with the investigation and addressed the SEC’s concerns. The exchange believes that the allegations should not have resulted in an enforcement action, let alone on an emergency basis. On the other hand, Binance.US referred to the SEC’s claims as “regulation by enforcement” and vowed to vigorously defend itself against the baseless allegations.