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A letter from Binance’s counsel says that SEC Chair Gary Gensler should be recused from the case, given his history with the exchange and its founder.

The Securities and Exchange Commission has accused Binance and Binance.US of redirecting over $12 billion in customer assets to entities controlled by Binance founder and owner Changpeng ‘CZ’ Zhao between 2019 and 2021.

The fresh SEC allegations come as supporting evidence in a request by the agency to a federal judge to place a temporary freeze on assets, beyond customer redemptions, at Binance.US.

The SEC also wants a judge to freeze Binance and Zhao’s assets but has only filed a temporary restraining order on Binance.US’s assets.

Spokespeople for Binance and Binance.US did not immediately provide comment. In a lengthy statement in response to the SEC’s initial enforcement action, Binance said, “We intend to defend our platform vigorously.”

SEC used bank info to connect dots

The agency accusation — buried in a document filed in federal court late on Tuesday — comes from an analysis of documents from accounts held by Binance, Binance.US, and Zhao at Silvergate and Signature Banks.

The banks produced the documents for the SEC,  and an analysis of the accounts was submitted to the U.S. District Court of the District of Columbia as sworn testimony by Sachin Verma, the assistant chief accountant for the SEC’s Enforcement Division.

Lawyers for the SEC alleged that most of the assets were funneled to Merit Peak. The agency quotes a statement by Merit Peak describing itself as “a proprietary trading firm with [Zhao’s] self-made wealth from the digital asset business.”

“Those funds consisted in significant part of Binance Platforms customers’ assets, including those of Binance.US Platform customers and other sources,” the SEC alleges. In total, the agency claims over $12 billion of the $22 billion Merit Peak received between 2019 and 2021 came from Binance and Binance.US customer assets.

Per the SEC’s court statement, the $11 billion from Binance customer assets was funneled through another entity called Key Vision Development Limited.

Using Merit Peak’s bank documents, the SEC alleges that most of Merit Peak’s money — $21.6 billion out of approximately $22 billion — went to a foreign affiliate of the firm Paxos, the New York-based trust company that partnered with Binance on the BUSD stablecoin.

Paxos ceased issuing the stablecoin after disclosing an SEC investigation in February, though the company still redeems the token. A Paxos spokesperson did not immediately respond to a request for comment.

Merit also traded on Binance.US, according to the SEC.

“However, the SEC has been unable to determine why a Zhao-controlled entity that was purportedly trading on the Binance.US  Platform using Zhao’s personal funds would have acted as a ‘pass through’ account for billions of dollars of Binance Platforms customers’ funds,” the SEC told the court.

More details from SEC filings

The SEC filed hundreds of pages of documents supporting its case against Binance overnight that contain more details about how Binance, Binance.US, and Zhao’s proprietary trading funds allegedly operated.

The same filing that makes the accusation around using customer funds for Zhao’s personal gain also details that the SEC has been investigating Binance.US since at least 2020, pre-dating current SEC Chair Gary Gensler’s tenure at the agency’s helm.

The markets regulator says it issued a subpoena to the U.S. affiliate on Dec. 17, requesting documents related to how the company controlled and stored its crypto assets. But the agency says that Binance.US stonewalled them for years, with a final response in February 2023.

“Its answers were not reassuring,” SEC lawyers say.

The SEC alleges that Binance controlled Binance.US crypto assets as the U.S. affiliates custodian, despite public assurances that separation exists between the two companies. That information comes partly from Binance.US’s own auditor, which says that Binance held custody of its U.S. affiliate’s assets until Dec. 1, 2022.

The auditor warned that the arrangement made it “very difficult” to ensure the company had enough assets to pay customers if they withdrew from their accounts.

“The audit report did not make clear who has custody and control of those U.S. customer assets since December 1, 2022,” the SEC says.

Those details are included in hundreds of pages of documents, including internal Binance documents and partial testimony from former Binance.US CEOs. On Tuesday, the agency filed for a temporary restraining order on the movement of assets from Binance.US, except for customer redemptions.

Parallels to accusations against FTX, SBF

The amount that SEC lawyers accuse Binance and Binance.US of illegally redirecting exceeds the approximately $8 billion in customer assets one-time Zhao rival Sam Bankman-Fried is accused of redirecting from failed trading platform FTX to the now-failed exchange’s sister company, Alameda Research.

Bankman-Fried has been criminally charged for redirecting billions of customer funds to backfill losses at Alameda, which he also owned.

Before his indictment and arrest, Bankman-Fried — who at one point accepted investment from Binance — told a reporter that his company wasn’t the only one who used customer funds for their own purposes.

“[M]ost exchanges did some variant on what we did–just not as big and without the run on the bank (at least recently) and more intentionally,” he said in a November 2022 Twitter DM exchange.

Bankman-Fried is scheduled to stand trial in October for criminal charges related to the misuse of customer funds. If found guilty on all current charges, he faces over 100 years in prison. The SEC has also sued Bankman-Fried on civil fraud charges.

© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

The lawsuit, filed in 2021, alleges the platform operated in a way that enabled users to evade financial regulation and scam consumers.

ALSO: Stablecoin balances may provide additional insight into price direction.

Advertisers of crypto services will face tougher rules in the UK from October 8, the Financial Conduct Authority announced today.

The UK watchdog said crypto companies must introduce a “cooling-off period” for first-time investors from October 8. Firms in the sector must also scrap “refer a friend” bonuses, which will be banned as part of a package to ensure crypto investors understand risk properly, the FCA said.

“It is up to people to decide whether they buy crypto. But research shows many regret making a hasty decision. Our rules give people the time and the right risk warnings to make an informed choice,” Sheldon Mills, executive director, consumers and competition, said in a written statement.

“The crypto industry needs to prepare now for this significant change. We are working on additional guidance to help them meet our expectations,” Mills added.

The news comes amid a dramatic crackdown by regulators on the other side of the pond — a campaign punctuated by the U.S. Securities and Exchange Committee filing lawsuits against both Binance and Coinbase this week.

In August 2022, the FCA finalized tougher rules to combat misleading ads relating to high-risk investment products. Those restrictions didn’t include crypto, as the regulator was at that time awaiting confirmation from the government that crypto products would be brought under its remit.

The FCA said in its announcement today that the steps taken today to tackle crypto ads are consistent with the restrictions introduced last year for advertising high-risk investments. 

It is also consulting on additional guidance laying out requirements for crypto advertisers. Those wishing to contribute have until August 10 to do so.

© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

The Financial Conduct Authority said it will treat crypto like a high risk investment, and will consult on new guidance for its rules on promotions.

A U.S. district court judge in the Eastern District of New York dismissed a widely watched lawsuit against an Ethereum protocol called PoolTogether after ruling that the plaintiff did not have standing to bring the suit. 

Plaintiff Joseph Kent initiated the class action lawsuit over a year ago, claiming that PoolTogether operated an illegal lottery. The case was being watched by many as a bellwether for how decentralized finance networks could be held responsible for allegations brought before courts. 

“While Kent no doubt has genuine concerns about PoolTogether — including its legality under New York law — a suit in federal court is not an appropriate way to address them,” Judge Frederic Block stated in the order. “Therefore, the Court holds that Kent lacks standing to sue and, accordingly, grants the defendants’ motions to dismiss on that ground.”

PoolTogether allows users to aggregate funds in liquidity pools, which are then used to lend out cryptocurrency while collecting interest. Individuals who contributed liquidity funds are randomly chosen to receive a portion of this interest.

“In sum, contributors forgo a guaranteed interest rate in exchange for a chance at a greater return on their investment,” the ruling stated, noting that PoolTogether amassed $122 million in user liquidity pools while doling out $4.3 million to the randomly selected winners.

“The central question on the merits of this lawsuit is whether the PoolTogether protocol constitutes an illegal lottery,” the order continued. “The defendants’ motions to dismiss raise other ancillary issues, such as who is liable for a violation of the statute and whether the statute contemplates secondary liability for aiding and abetting or conspiracy. Those questions are thorny and unanswered, and should probably be resolved by the New York Court of Appeals.”

The judge noted that Kent had participated in the protocol of his own accord and “suffered no concrete harm at the hands of the defendants.”

“Kent is free to pursue his claims in state court,” Judge Block wrote, noting that plaintiffs in federal court must prove that they suffered concrete harm.

Leighton Cusack, the co-founder of PoolTogether and defendant in this case, did not respond to a request for comment from The Block. He said on Twitter that a hearing yesterday had represented a “significant victory.”

© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

A bug in Arbitrum’s sequencer code caused a brief pause in the network’s ability to batch transactions to the Ethereum blockchain.

As a Layer 2 network, Arbitrum batches up transactions and submits them in a single transaction to Ethereum in an effort to help reduce the load on the main blockchain. To do so, it uses what’s called a sequencer to gather these transactions, order them and batch them onto Ethereum.

Yet a bug in the sequencer’s code stopped it from being able to batch transactions onto Ethereum, according to Arbitrum developers. This caused a brief outage where transactions were not getting confirmed on the main chain.

“When the Sequencer tried to post a batch on-chain, the bug hit and the transaction reverted,” the official Arbitrum developers Twitter account said on Wednesday.

There was a bit of confusion when this happened over the levels of ether in the sequencer’s wallet. When the system is working as designed, the wallet gets refunded with the amount of transaction fees that it spends. Since the transactions were not getting confirmed on Ethereum, a second wallet — that is set up to automatically refund it — didn’t do so. This worked as intended and didn’t cause the outage.

After the bug was fixed, the second wallet continued to refund the sequencer’s wallet, and it carried out its duties as normal.

© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

After the SEC announced separate lawsuits against Binance and Coinbase this week, figures across the crypto space have been minting Coinbase’s “Stand with Crypto” NFT to show their support.