Bloomberg: US SEC is investigating Binance’s BNB token

Citing internal sources, Bloomberg reported on Monday that the U.S. Securities and Exchange Commission ( SEC ) is reviewing whether Binance 's BNB token is an unregistered securities offering. Binance conducted its initial coin offering (ICO) in July 2017, raising a total of $15 million.

The U.S. Securities and Exchange Commission is investigating the company and the origins of its BNB token, now the world's fifth-largest. This could be a troubling development for Binance as it faces multiple investigations in Washington. The SEC has brought dozens of enforcement actions against ICOs, which involve issuing virtual tokens to raise funds.

Binance said in a statement that it would be “inappropriate for us to comment on our ongoing conversations with regulators.” The company added that it is cooperating with the authorities and “we will continue to meet all requirements set by regulators.”

If an investor buys a virtual currency to fund a company or project with the intent to profit from those efforts, the virtual currency may fall under the SEC’s jurisdiction. The decision is based on a 1946 U.S. Supreme Court ruling on investment contracts.

Binance, which operates the world’s largest exchange, says it is not registered in any one country but has offices around the world. Bloomberg News has previously reported that Binance faces investigations from the Justice Department, the Commodity Futures Trading Commission and the IRS.

Fund Raising

Before BNB launched in 2017, Binance laid out its plans in a white paper. The document said its issuance would be limited to 200 million, with half of the tokens sold through an ICO, which was held on multiple platforms around the world. The other 80 million would be reserved for Binance’s founding team, which includes billionaire CEO Changpeng Zhao .

In a white paper reviewed by Bloomberg, Binance said up to 85% of the funds raised in the ICO would be used to build and market Binance’s global exchange. It did not mention any restrictions on who could participate.

To attract investors to BNB, Binance offered lower fees to traders who paid in the token. It also paid many of its contractors in the currency, including one U.S. resident who said he bought BNB during the ICO — a detail that could be key to the SEC’s assertion of jurisdiction in any case.

The SEC’s enforcement investigation may not result in the regulator prosecuting companies or individuals. One person familiar with the matter said the investigation involving BNB may take several more months to reach any conclusion.

One of the people familiar with the matter said that in addition to BNB, the SEC is also investigating possible trading abuses by Binance insiders and whether Binance.US, a U.S. subsidiary established in 2019, was properly separated from its global peers.

Binance.US

Another source said the SEC is also looking at market makers owned or partially owned by Binance CEO Changpeng Zhao. The regulator wants to understand Zhao Changpeng's ownership of Binance.US and whether Binance.US has engaged in broker-dealer activities. One of the SEC's focuses is whether Binance.US is completely independent of the Binance global exchange and whether employees may be involved in insider trading.

Binance stressed that Binance.com and Binance.US “are separate entities” and that the former is only for non-U.S. users. The company said, “Binance.US is an independent trading platform focused on the United States and serves U.S. users by providing products and services in compliance with U.S. federal and state regulations.”

Binance.US said in a separate statement that it is “committed to maintaining the highest standards of compliance.”

BNB has surged in value amid the coronavirus pandemic, as cryptocurrencies have risen rapidly. The token is currently priced at around $300 and has a market capitalization of around $48.5 billion. It is also an integral part of Binance’s expanding crypto ecosystem, which now includes everything from digital wallets to its blockchain.

BNB

Recently, as part of a broader rebranding of its blockchain, Binance changed the full name of BNB from Binance Coin to Build and Build. The company said the changes were made based on user feedback that “there is a need to further solidify the decentralized nature of the chain and strengthen community governance of the chain.”

The company also abandoned plans set out in its ICO white paper to use 20% of the exchange’s profits to buy back BNB every quarter. In a 2020 blog post, Zhao Changpeng said the change was made in response to legal advice that “could be misinterpreted as securities in certain regions.”

If BNB is found to be a security, Binance could find itself in a similar situation to Ripple Labs Inc. Ripple has been locked in a bitter court battle with the SEC after the regulator sued the company and two of its executives in December 2020 for alleged violations in the sale of a crypto token called XRP . Ripple argues that the tokens are a medium of exchange for virtual currencies, not securities, and that the SEC's legal theory is flawed.

Since taking office in April 2021, SEC Chairman Gary Gensler has said that almost all ICOs are securities and should be regulated by his agency.