Binance.US Not Being Totally Forthcoming, SEC Complains in New Filing

Cryptocurrency exchange Binance.US is not fully complying with the Securities and Exchange Commission’s requests for information about its customers’ assets and other matters, attorneys with the U.S. regulator alleged Tuesday in a court filing.

The SEC sued Binance Holdings Ltd., BAM Trading Services, BAM Management U.S. and Binance founder Changpeng “CZ” Zhao last year, alleging that Binance Holdings (the entity behind the bigger, global cryptocurrency exchange) and BAM Trading (which does business as Binance.US) are violating U.S. securities laws. The regulator said that Binance.US customer assets could – inappropriately – be controlled by Binance employees outside the U.S.

Binance and Binance.US have denied the charges and filed to dismiss the case. In June, shortly after the suit was filed, Judge Amy Berman Jackson signed a consent order directing Binance.US to ensure it has control of its customers’ assets and launching expedited discovery.

However, Binance.US employees have not produced all of the discovery materials requested, and have been less than helpful in answering questions or otherwise addressing outstanding requests, SEC attorneys said Tuesday in a joint status report.

Binance.US, for its part, said in the same joint report that it had complied that it had “complied with its obligations,” though the SEC said it needs further discovery to verify this.

In one section, the SEC implied Binance.US officials were not being fully forthcoming about whether or not Binance Holdings employees – referring to the global exchange – still had access to Binance.US customer funds.

“From the beginning of this litigation, BAM has represented to the SEC and to the Court that it has sole custody and control over its Customer Assets (including Private and Administrative Keys) and related transfers and withdrawals, including to the exclusion of the Binance Entities,” the filing said.

Binance.US employees pointed to its multikey setup as evidence of this, the SEC said. However, “expedited discovery has cast doubt upon BAM’s claims that it exclusively controls the private keys,” the regulator went on to add.

Binance Holdings employees still control the Amazon Web Services servers that host Binance.US’s wallet software, the filing said. The SEC also said Binance.US has not proven that its employees have access to those private keys and customer assets, or that Binance Holdings employees do not have similar access.

“Moreover, discovery has revealed that BHL can at least effect transfers of BAM’s crypto assets from customer deposit wallets to hot wallets when transfers get ‘stuck’ while using the PNK system. BAM’s Head of Clearing, Tao Zhang, testified that he routinely reaches out to a chat group involving BHL employees that he calls the ‘BHL wallet team’ when BAM’s clearing team has ‘technical issues’ with respect to asset movement,” the filing said.

In its response further down in the filing, Binance.US said that the clearing lead “occasionally contacted BHL personnel for technical assistance,” but that Binance Holdings employees did not have control over customer assets instead of Binance.US personnel.

“The SEC has not provided a modicum of evidence that BHL controls customer assets such that further burdensome discovery on this subject would be merited. Moreover, if the SEC has further questions about BHL’s access with respect to asset transfers, it can ask BHL for clarification at its upcoming deposition of a BHL employee,” Binance.US said in the filing.

The SEC said it had a number of questions about whether Binance.US employees were adequately monitoring transfers tied to Binance Holdings; whether Binance.US employees outside the U.S. had access to the exchange’s customer assets and whether those employees were also being paid by the global entity; and who all has access to Binance.US’s cold storage and staking wallets.

Binance.US pushed back in the filing, saying it had responded to all of the SEC’s document requests and that expedited discovery should end.

The SEC’s continuing requests for information far exceed the consent order, Binance.US said.

“There is also no justification for additional depositions given that after 8 months of discovery, the SEC still has not identified the slightest evidence that BAM’s customer assets are not secure or have been misused or dissipated in any way,” the filing said.

Binance Holdings added at the bottom of the filing that Zhao opposes a deposition request by the SEC, given he is no longer Binance’s CEO or a director for Binance.US.

Read the full filing and exhibits below.