The litigation tug-of-war escalates, and the SEC requests an investigation into Binance.US assets

Binance ’s legal tug-of-war with U.S. regulators is escalating, with the SEC slamming Binance.US in its latest court filing, calling it uncooperative.

The U.S. Securities and Exchange Commission (SEC) asked the court to investigate Binance.US assets, accusing it of failing to fully comply with requirements to submit documents and other information related to the custody and control of customer crypto assets, according to documents filed in court on Monday.

BAM Trading, the entity behind Binance US , said it was unable to provide this information.

BAM Trading’s lawyers said in the filing that the SEC’s filing requirements were “overbroad” and caused too many “inconveniences” for the exchange to implement. “BAM objects to the SEC’s requirements because they are vague, ambiguous, overbroad, lack specificity, or are oppressive,” BAM’s lawyers wrote.

The SEC previously asked BAM to provide a series of documents, including records of the company's handling of customer assets, proof of the company's reserves, a statement of its overall financial condition, etc. The regulator said that these requirements were deliberately ignored by Binance.

What is the relationship between Binance.US and Ceffu?

One of the requests filed by the SEC is related to the exchange’s alleged use of a custody service called CEFFU to transfer U.S. customers’ funds abroad. In other words, is Binance.US a client of crypto custody provider Ceffu?

The SEC’s concern is about letting foreign entities control the assets of U.S. customers. The agency said in court documents: “Binance provided inconsistent accounts of key facts, slowly produced small portions of documents and information, and blocked entire categories of information that could have exposed its unreliable custody of customer assets.”

Additionally, the SEC stressed the urgency of accelerating discovery in light of changes in Binance.US personnel, including its president, who it believes may hold important information regarding the custody and availability of assets.

However, BAM’s lawyers responded that the requests were “unduly burdensome” and forced BAM to incur “substantial expenses.” In addition, the lawyers argued that some documents were either not in the hands of the exchange or were not “within the scope” of the SEC’s investigation.

Companies under investigation by federal agencies often deny requests for information on the grounds that it is too broad or burdensome for their employees to understand, and while deferrals are not always successful, they can cause significant delays in cases.

“Not a Binance entity”

BitPush previously reported that Ceffu was launched in December 2021, originally named Binance Custody , and was renamed Ceffu in February 2023.

In documents filed in August and unsealed in September, the SEC said Binance.US’s use of Ceffu may have violated a previous legal agreement designed to ensure that only U.S. users have access to funds. The agreement prohibits Binance.US from using any other entity associated with Binance or Zhao Changpeng for custody, but it can use a third-party provider based in the United States.

Binance.US said in a legal filing on Sept. 12 that the SEC’s concerns were “much ado about nothing” because the wallet provider has no control over customer funds and that Ceffu is simply the marketing name for the wallet custody software that Binance Holdings developed and subsequently licensed to the U.S. department.

Ceffu said in a post on Friday that it excludes the U.S. from its business and “strongly disagrees” with the SEC’s assertion that it provides third-party “wallet hosting software and support services” to Binance.US.

Blurred information

According to information published on the Binance website , Ceffu is known as Bifinity UAB, and Bifinity’s registration in Lithuania (which allows it to provide cryptocurrency trading and wallet services) is still listed on the Binance website and is listed under the various regulatory licenses obtained by Binance.

In November 2022, a SEC filing stated that Binance CEO Changpeng Zhao was the sole shareholder of Bifinity and stated that two of Bifinity's three board members also worked for Binance. A SEC filing in June stated that the company is ultimately still owned by Zhao, so the relationship between Ceffu and Binance remains confusing.

Binance.US trading volume is evaporating

Binance.US trading volumes are evaporating as the exchange’s battle with U.S. regulators intensifies.

Data from CCData shows that in August, Binance.US's monthly trading volume fell 98% from January 2022 to just over US$286 million. From the beginning of September to September 15, Binance.US's trading volume was US$115.7 million. Therefore, the platform's trading volume is likely to fall further in September.

As of Monday, Binance.US had a daily trading volume of about $10.5 million, according to data tracker CoinGecko . By comparison, Coinbase Global Inc., the largest U.S. cryptocurrency exchange, had a daily volume of $948 million.

Most of the decline has occurred since March, when Binance was hit with charges from the U.S. Commodity Futures Trading Commission ( CFTC ). Then in June, the SEC sued Binance.US, Binance , and Zhao Changpeng, alleging a series of violations, including "misrepresenting the control and supervision of trading on the Binance.US platform."

Under the shadow of regulation, several banking partners have cut ties with Binance.US, and there have been significant changes in the management of Binance.US . Binance.US CEO Brian Shroder resigned last week when the company laid off one-third of its employees.

Regarding the document dispute, U.S. District Court Judge Zia Faruqui of the District of Columbia encouraged Binance.US and the SEC to cooperate at the hearing. Faruqui said: “I need all of you to work hard to ease the dispute, forget the past, and try to provide me with some issues that you think can be resolved.”

The judge said Binance needed to provide more information about its current custody solution: “I think we need more than we have right now,” adding that he was “not very confident that BAM has full control over its assets.”

If the court grants the SEC's motion to compel at the October hearing, it will lead to closer scrutiny of Binance's operations and potential violations of securities laws. Binance may have to disclose sensitive information, including documents related to its wallet custody software and its relationship with entities such as Binance Holdings Ltd. (BHL), and violations discovered during the investigation could lead to penalties, fines, and further legal action.