Binance US Under Fire for Alleged Noncompliance in SEC Probe

Not only is Binance feeling the heat from the SEC, but the exchange was also forced to completely exit the Nigerian market after serious regulatory pressure.

Binance.US is currently facing scrutiny from the SEC over alleged failures to disclose crucial information about customer asset custody. This comes as the exchange is facing wider legal challenges including a lawsuit for selling unregistered securities and mixing customer assets. This scrutiny comes alongside Binance's decision to exit the Nigerian market because of regulatory pressures. Meanwhile, Coinbase is also engaged in a legal battle with the SEC, looking to dismiss a precedent regarding the classification of crypto assets as securities from the SEC vs. Wahi case.

Binance US and SEC Face Off

Binance's U.S. arm, Binance.US, is currently under scrutiny by the U.S. Securities and Exchange Commission (SEC) for allegedly failing to provide crucial information about customer assets and other vital components of an ongoing investigation. The SEC has accused BAM Trading Services, which operates as Binance.US, of being "unable or unwilling" to answer questions related to the custody of customer assets. This dispute has led the SEC to ask for the intervention of a Washington, D.C. District Court to expedite the discovery process.

The core of the SEC's investigation revolves around whether employees from the non-U.S. section of Binance could access Binance.US customer assets. According to the SEC, Binance.US has not adequately demonstrated that it lacks access to private keys or other methods of accessing customer funds.

Despite these serious allegations, Binance.US holds firm that it has adhered to all the SEC's "exceptionally broad" information requests and argues that the claims about customer assets are baseless. The exchange insists it has already given thousands of documents that detail its asset custody practices, including sworn declarations, monthly reports, and has facilitated several inspections of devices used for the custody of customer assets.

This is just one of the many legal challenges Binance and its officials are facing. In June last year, the SEC filed a lawsuit against Binance, Binance.US, and Changpeng "CZ" Zhao, the exchange's founder and former CEO, for allegedly selling unregistered securities and mixing customer assets with another company controlled by Zhao. This comes after a huge $4.3 billion settlement Binance reached with the U.S. Department of Justice in November, where it admitted to breaching U.S. anti-money laundering and counter-terrorism financing laws. As part of this settlement, Zhao pleaded guilty to charges of money laundering and is now awaiting his criminal sentencing hearing.

Binance Exits Nigerian Market

Binance is not just feeling the heat from the SEC. Binance announced its decision to exit the Nigerian market, leading to the discontinuation of all services involving the Nigerian naira (NGN). The platform will stop all NGN withdrawals after Mar. 8, and any remaining NGN balances in user accounts will be converted to the Tether USDT stablecoin. Binance has urged its users to either withdraw their NGN, trade their NGN assets, or convert them into cryptocurrency before these services are completely stopped. This happened in response to the growing regulatory scrutiny and pressure that Binance has been facing in Nigeria.

In late February, Binance's peer-to-peer platform already delisted all NGN trading pairs. Additionally, NGN deposits stopped being accepted on Mar. 5, and all trading pairs involving NGN will be removed from Binance by Mar. 7. Binance Pay will also exclude NGN from its list of supported payment options starting Mar. 6.

Binance is accused of handling illicit transactions in Nigeria. The Central Bank of Nigeria's governor pointed out some serious concerns about "suspicious flows'' of funds through the exchange. Things seriously escalated when Nigerian authorities confiscated the passports of two Binance executives. The Nigerian House of Representatives Committee on Financial Crimes has even called Binance CEO Richard Teng to address these concerns.

This is a major change in attitude towards crypto in Nigeria considering the country was ranked second in the world for cryptocurrency adoption by Chainalysis in September of 2023 and was the most crypto-obsessed country according to Google searches in August 2022. Despite this enthusiasm from the public, Nigerian regulators have been way less welcoming, with calls for bans on Binance and other crypto trading platforms.

Meanwhile, another crypto exchange is in the middle of a legal battle with the SEC. Coinbase's legal team has requested U.S. District Judge Katherine Failla to dismiss a precedent set in the SEC vs. Wahi case, arguing that the judgment on secondary sales being considered as "securities transactions" was never properly evaluated in court.

In July of 2022, the SEC started legal action against Ishan Wahi, a former Coinbase product manager, and two others for insider trading involving nine cryptocurrencies. The defendants contended that the tokens in question were not "investment contracts" and therefore fell outside the SEC's regulatory scope. Coinbase, among many others, supported this motion with briefs.

However, the legal proceedings took a turn when the SEC reached a "zero-dollar, no-admit-no-deny" settlement with the Wahi brothers before the motion was resolved. Later, an unopposed default judgment against Sameer Ramani led to the court accepting the SEC's allegations that the crypto assets were "investment contracts." This classification is crucial as it subjects these assets to SEC regulation.

Coinbase attorney Michael Savitt criticized the judgment against Ramani, pointing out that it was made in the absence of any contestation from the defendant, thereby questioning the thoroughness of the court's examination of the issue. Savitt also argues that this judgment should not influence the ongoing legal battle between Coinbase and the SEC.

This legal stance by Coinbase came in response to an SEC notice that attempted to leverage the Wahi insider trading case to strengthen its position in its lawsuit against Coinbase. The SEC's lawsuit, which was filed in June of 2023, accuses Coinbase of violating federal securities laws by listing 13 tokens that it believes are "securities."

The contention at the heart of the lawsuit and the broader debate in the cryptocurrency industry is whether crypto assets traded on platforms like Coinbase meet the criteria of the Howey test for being considered securities.

The outcome of this case could have huge implications for the regulatory landscape of the cryptocurrency market, especially when it comes to the SEC's authority over crypto exchanges and the classification of crypto assets as securities.