SEC Accuses Binance.US of Artificially Inflating Trading Volumes

The U.S. Securities and Exchange Commission (SEC) has leveled serious accusations against Binance.US, the American branch of the renowned cryptocurrency exchange, Binance. The SEC claims that the exchange has been artificially inflating its trading volumes through the illegal practice of wash trading.

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What is Wash Trading?

In the world of finance, wash trading involves engaging in trades with oneself or a connected entity, often lacking any real economic substance. The aim is to create an illusion of higher trading activity and prices. While wash trading for stocks and bonds was banned in the U.S. almost a century ago, the growing prevalence of this practice in the crypto market has raised significant concerns.

With trading volumes being touted as a crucial marketing point for crypto exchanges, the repercussions of such manipulations are far-reaching.

Read More: Federal Reserve Steps in to Address SEC Lawsuit Against Binance and CEO CZ

Binance.US Caught in the Eye of the Storm

According to the SEC, Binance.US, ever since its inception in 2019, has been boosting its trading volumes through a Swiss trading company known as Sigma Chain, which is under the control of Binance’s Chief Executive, Changpeng Zhao. The SEC further claims that the day after the exchange’s launch, nearly 70% of trading volume for a specific token was a result of wash trading between Sigma Chain accounts and accounts belonging to Zhao and other senior employees.

Binance.US vehemently refutes these accusations, firmly stating that the claims are based on a misinterpretation of facts and an erroneous application of the law. A spokesperson for Binance.US emphasized the company’s belief that the SEC’s allegations regarding wash trading lack any factual basis.

“We strongly believe that the SEC’s allegations regarding wash trading are entirely unfounded, and based on a fundamental misunderstanding of the facts and a misapplication of the relevant law,” a spokeswoman for Binance.US said. 

Is This Now an Industry-Wide Issue?

A recent study, set to be published in the esteemed journal Management Science, indicates that wash trading may be far more prevalent than previously suspected. The study suggests that over 70% of trading volume on various crypto exchanges could be attributed to wash trading. Such revelations imply that this dubious practice is an industrywide issue with significant ramifications.

For context, the study estimated that wash trading would have created a fake volume of more than $6 trillion in the first quarter of 2020 alone. Meanwhile, the professors conducting the study didn’t analyze Binance’s U.S. arm due to its late 2019 launch but found that the parent Binance exchange engaged in wash trading for about 46% of its total volume.

Binance Stands Strong

The aftermath of the SEC’s lawsuit has been nothing short of catastrophic for Binance.US. Market data from provider Kaiko shows a drastic plunge in the exchange’s market share, dropping to just a little over 1%. In addition, under the pressure of federal investigations, several high-ranking officials at Binance have tendered their resignations, adding to the turmoil.

On a global scale, Binance still commands a substantial portion of the market, retaining 52% of the share, albeit down from 60% earlier in the year. However, its American counterpart faces an uncertain future.

As the Justice Department investigation gains momentum, Binance.US braces itself for a potentially expensive and lengthy litigation process. The stormy journey ahead remains fraught with challenges and uncertainties for the once-promising American arm of the global exchange giant.