The US Securities and Exchange Commission is investigating whether Binance, the biggest cryptocurrency exchange, violated securities rules when offering products and services five years ago.
The SEC is examining the company's origins and operations and its BNB token, which is regarded as the world's fifth-biggest cryptocurrency. According to people familiar with the matter, it's also looking into whether the initial coin offering in 2017 violated securities laws.
The investigation into the company's early days is a potential setback for Binance, as it faces multiple federal investigations. The SEC has been taking action against initial coin offerings, or ICOs, for securities law violations. BNB has been a part of the company's massive crypto empire.
In response to a query regarding the investigations, Binance said it would not be able to provide further details about its discussions with regulators.
“It would not be appropriate for us to comment on our ongoing conversations with regulators, which include education, assistance, and voluntary responses to information requests,” Binance said.
The company added that it has been cooperating with authorities and "will continue to meet all requirements set by regulators.”
The SEC has said that virtual currencies can be considered securities if investors are looking to fund a project or company to profit from the transactions. This ruling is based on a 1946 Supreme Court decision.
Although it doesn't have a single country of residence, Binance, which is the world's biggest exchange, has targeted federal investigators looking into the crypto industry. Several reports have indicated that the company is being investigated by multiple agencies, including the Justice Department and the IRS.
The U.S. SEC are investigating if the 2017 initial BNB offering amounted to the sale of a security that should have been registered with the agency and whether Binance Holdings Ltd. broke securities rules by selling digital token five years ago. Bloomberghttps://t.co/ELIf44uk75— Wu Blockchain (@WuBlockchain) June 7, 2022
In 2017, the company unveiled its plans to launch its platform, which included a white paper that detailed its expectations for the BNB token. It noted that the circulation of the digital currency would be limited to 200 million. About 80 million of the total would be allocated to the company's founding team, which includes its CEO, Changpeng Zhao.
According to the white paper, about 85% of the funds raised during the initial coin offering would be used to build and market the company's global exchange. It didn't provide any restrictions regarding who could participate.
To attract more investors, the company cut the fees that it charges to its traders who pay with the BNB token. It also paid various contractors, including a US resident who said he bought the digital currency during the initial coin offering. This detail could be important for the SEC to consider whether the initial coin offering violated securities laws.
Although an investigation by the SEC could lead to filing a lawsuit, it's unlikely that the agency would take action against individuals or firms. The investigation of Binance is expected to take months.
SEC wants to regulate ICOs
Aside from the BNB issue, the SEC is also looking into possible violations of securities laws by the company's insiders. One of the people said that the agency is also investigating the structure of Binance's American affiliate, which was created in 2019.
If the BNB is considered a security, it could put the company in the same position as the other major digital currency, Ripple, which is currently in a court battle with the SEC. In December 2020, the agency sued the company's executives and two of its subsidiaries for allegedly breaking the rules when it sold a cryptocurrency token known as XRP. The company has argued that the token is a medium of exchange and doesn't fall under the same legal definition as security.
Since becoming the agency chairman in April 2021, Gary Gensler has said that almost all initial coin offerings should be regulated by the SEC.