The world’s largest crypto exchange Binance is facing a US investigation for violating securities rules by selling cryptocurrency when the platform took off five years ago.
The SEC review touches on the company’s assets and those of BNB, which is now the world’s fifth largest cryptocurrency.
Investigators are studying whether the 2017 initial coin offering amounted to the sale of a security that should have been registered with the agency.
Scrutiny of BNB’s early days could be a worrying development for Binance, as it faces multiple investigations in Washington. The SEC has intervened in dozens of initial coin offerings, which include issuing virtual currencies to raise funds.
BNB has been a feature of Binance’s expanding crypto empire. “It is not appropriate for us to comment on our ongoing conversations with regulators, which include education, assistance, and voluntary responses to requests for information,” the platform said in a statement.
The company added that it is working with the authorities and continues to meet all requirements set by regulators.
Virtual currency may fall under the jurisdiction of the Securities and Exchange Commission if investors purchase it to finance a company or project with the intention of benefiting from those efforts. This decision is based on the US Supreme Court’s 1946 ruling on determining investment contracts.
Binance’s Rapid Rise
Binance, which operates the world’s largest platform and says it does not have headquarters in any country but has subsidiaries scattered around the world, has emerged as a focal point for US investigators seeking to rein in the crypto industry.
Bloomberg News previously reported that it faces investigations from the Department of Justice, the Commodity Futures Trading Commission and the Internal Revenue Service.
Before launching BNB in 2017, Binance outlined its plans in a white paper . The document said its distribution was limited to 200 million with half of the tokens being sold through the initial coin offering, which took place across multiple platforms around the world. Another 80 million will be allocated to the platform’s founding team, which includes billionaire CEO Changpeng Zhao.
In the white paper, the platform said: 85% of the funds raised in the initial coin offering are used to build and market the global Binance platform. It did not mention any restrictions on who can participate.
In order to attract investors to BNB, the platform has offered lower fees to traders who pay with cryptocurrency.
It also paid several of its contractors with this coin, including a US resident who said he bought BNB during the initial coin offering.
These details can be essential to the SEC’s assertion of jurisdiction in any case it may announce.
The investigation may not lead the regulator to sue a company or individuals. And the investigation involving BNB is likely months away from any conclusion.
In addition to BNB, the commission is also investigating potential trade violations by Binance insiders, and whether Binance.US, the US subsidiary formed in 2019, has been appropriately isolated from its global peer.
The commission is also examining market makers associated with Zhao, widely known as CZ. The commission expressed interest in Zhao’s ownership stakes in market-making companies, and whether the platform carried out broker-dealer activities.
Binance is the fifth largest digital currency in the world
Binance confirmed that Binance.com and Binance.US are two separate entities, with the first entity serving non-US users.
She said: “Binance.US is a separate trading platform focused on the United States. It serves US users by providing products and services compliant with US federal and educational regulations.
The value of BNB has skyrocketed amid the surge of cryptocurrencies during the coronavirus pandemic. The currency is currently valued at about $300 and has a market capitalization of about $48.5 billion.
BNB is an integral part of Binance’s ever-expanding crypto ecosystem. Its crypto system now includes everything from digital wallets to its blockchain.
As part of a broader rebranding of its blockchain network, the platform changed BNB’s full name to Build and Build from Binance Coin.
The company said it made the changes due to the need to solidify the decentralized nature of the on-chain and strengthen community governance across the chain.
The company also backtracked on plans outlined in the whitepaper to spend 20% of its profits every quarter to buy back BNB.
Zhao said in 2020 that the change was made in response to legal advice that it might be misunderstood as a security in some regions.
In the event that BNB is considered a security, this puts Binance in a similar position as Ripple. Ripple is in a legal battle with the regulator after the regulator filed a lawsuit against the company in December 2020. The lawsuit relates to a rule violation in the sale of the cryptocurrency known as XRP.
Ripple argues that the cryptocurrency acts as a medium of exchange for virtual currencies rather than securities. She says the Securities and Exchange Commission’s legal theory is flawed.