Hey, the alarms are going off and our submarine is taking on water.

You know that awooga sound you hear when red lights flash and everything goes to shit? That’s happening now.

Why? Because the world’s largest crypto firm is about to implode.

More in the deep dive, the entirety of the newsletter.

Espresso Shots

☕️ The Case Against Binance 📑 ⚖

Now, this is breaking news and the story is still developing, but yesterday the SEC revealed its case against Changpeng Zhao and Binance.

This isn’t an unregistered securities case like the SEC has levied against Ripple or Kraken.

But you better believe there are some unregistered securities charges in this suit, but more on that later.

This case is simultaneously more expansive and the charges are more specific. This isn’t the kind of case that results in millions of dollars of fines, this is the kind of case where individuals end up in jail.

So, what crimes and violations are the SEC alleging that Binance committed?

Well, the principle charges are pretty broad. So broad, that we’re going to have to break them down throughout the newsletter.

And those charges are the mishandling of customer funds and lying to both regulators and its customers about Binance’s operations.

The most damning allegations are that Changpeng Zhao wasn’t just commingling funds, he was also withdrawing them at a whim and using them like his own personal bank account, which is one of the most tired, financial bad guy moves.

And to be even more cliché, naturally, CZ used those misappropriated funds to buy a yacht.

Other than the blatant misuse of customer funds, those funds were also being sent by Binance to a company called Merit Peake, which CZ also controls.

CZ used Merit Peake as well as Sigma Chain, another shadow/shell company to engage in wash trading by using… you guessed it, Binance customers’ funds.

This means that CZ and those upper-level Binance execs working with him were able to make millions while only putting other people’s money at risk.

☕️ The Charges Against Binance.us ⚡⚖

As we core into the rotten Binance apple, it’s impossible not to mention the company’s U.S.-compliant arm, Binance.us.

It would seem that Binance.us was never quite… U.S. compliant.

A big part of Binance.us’s regulatory requirements was that CZ, CEO of Binance International, had to be hands-off with this branch of the company.

Though apparently, this was not the case. Changpeng Zhao and several senior leaders of Binance International were very much active behind the scenes, using Binance.us execs as “puppets.”

Additionally, though Binance.us was created to comply with U.S. crypto regulations, some American customers were encouraged to bypass U.S. restrictions.

This may have even included explicit instruction to leave sections of “Know Your Customer” forms blank to sneak through American sanctions.

“Binance’s plan to retain lucrative U.S. investors while pretending to restrict them was a success,” reads the complaint from the SEC.

Well, successful, until now.

Spilling the Beans

The 13 Crimes of Changpeng Zhao ⚖ 🪙

Now, time to dive into Changpeng Zhao, Binance’s leader, founder, and the man at the heart of this debacle.

This is a big story. We’re a newsletter dedicated to bringing you crypto news, but expect this story to spill out to the mainstream much like Sam Bankman-Fried and the FTX implosion.

And unfortunately, it would seem that there are some very clear parallels between SBF and CZ.

One of the primary methods SBF illegally and erroneously shuffled funds was through FTX’s sister firm, Alameda.

It would appear that CZ was doing much the same thing through Merit Peake and Sigma Chain, to the tune of $20 billion.

Now, let’s get into CZ’s rap sheet. What is he actually being charged with?

1. Violating securities laws and investor and market protections.

This is sort of the thesis of the charges against CZ and Binance.

This encompasses those customer funds that CZ and senior executives were playing with, manipulating the market with, and using to buy a yacht.

2. Unlawful solicitation of investors

This charge related to the continued, illegal efforts by offshore Binance to coerce American investors to use their unregulated, international platform.

You can’t just make an American compliant branch of your company and then explicitly guide customers through loopholes to ignore those compliances.

3. Lack of Registration of a broker dealer, exchange, or clearing agency

This alleges that CZ and Binance willfully never registered with the SEC, instead skirting around it for years as a means of avoiding the protections and regulations in place.

4. Unregistered Offers and Sales of Crypto Asset Securities

This relates to the sale and advertisement of Binance’s staking programs as well as the BNB Vault and Simple Earn programs.

The SEC claims that Binance left out crucial information informing investors of the risks.

This area of the suit immediately brings to mind the Gemini Earn program. It’s almost like Binance created a “Best Of” compilation of the most high-profile crypto lawsuits.

5. Misrepresenting Controls of the Binance.us Platform

This is exactly what it sounds like. Binance made it seem like there was surveillance in place to protect investors that simply did not exist.

More on this in the coming charges.

6. A Multi-Step Plan to Evade U.S. Laws

This charge alleges that CZ has quite literally had a plan since 2018 to skirt U.S. laws.

The SEC even has a Binance CCO confessing, “we do not want [Binance].com to be regulated ever.”

7. Binance Controlling Binance.US

This charge relates to CZ and other senior executives control over operations at Binance.us.

The SEC have a statement from a former Binance.us marketing CEO telling the Binance CCO that her, “entire team feels like [it had] been duped into being a puppet.”

8. Claims that Binance Didn’t Serve U.S. Customers

On the surface, CZ created Binance.us to comply with regulation and separate the American customer base from offshore Binance.

But in reality, Binance was doing exactly the opposite and attempting to seduce American users over to Binance international.

The SEC have the Binance CCO stating, “On the surface we cannot be seen to have US users, but in reality, we should get them through other creative means.”

And CZ himself has said that Binance’s goal was to, “reduce the losses to ourselves, and at the same time to make the U.S. regulatory authorities not trouble us.”

9. Commingling Customers’ Funds

This charge relates to Merit Peake and that wash trading that we alluded to earlier in the newsletter.

CZ and the Binance execs that acted with him put millions upon millions of other people’s money at risk for their own gain.

Also, if Binance had ever registered as a clearing agency, broker, or exchange with the SEC, as the third charge mentions, they never would have been able to get away with this in the first place.

10. False Advertisement of Surveillance and Control

This charge specifically relates to Changpeng Zhao touting safeguards that never existed.

The SEC has included this 2019 quote from CZ in the filing: “CREDIBILITY is the most important asset for any exchange! If an exchange fakes their volumes, would you trust them with your funds?”

11. Additional False Advertising

This addresses statements from BAM Trading and BAM Marketing, subdivision of Binance.us, that purported to have the same, nonexistent surveillance and controls.

12. Failure to Implement Controls

This charge actually relates to the failure of those safeguards that were never put in place, rather than the lies and false advertising around them.

If Binance/Binance.us had any of those safety features that they claimed, the illegal wash trading and self-dealing that occurred wouldn’t have been possible.

13. Unregistered Sale of Securities

This charge invokes the 1933 Securities act.

Whether or not crypto even constitutes unregistered securities has been a long, heated debate, and there are several bills currently in the works that will answer that question (A definite no).

This is the one charge that likely may not stick, but even then, this investigation has been going on for 4+ years.

It doesn’t help that the SEC has this hysterical statement from Binance’s CCO.

This section may be historic, constituting the first time that “fkcin” and “bro” were used in a sentence in an SEC filing.

And even if all of the charges invoking securities were thrown out, CZ and Binance would still be in some pretty hot water.

With that in mind, this is a great opportunity to remind you of the most important phrase in this industry:

“Not your keys, not your crypto”

When your crypto is on an exchange, it is not in your possession. It is always recommended to utilize decentralized wallets whether hot or cold to store your crypto when you are not actively trading it.

There are plenty of great options like MetaMask or Ledger wallets. So don’t take the risk, take self custody of your crypto today!

Everything considered, this case is still unfolding but it seems entirely possible that we may have some Binance media to compete with all those upcoming, Sam Bankman-Fried true-crime biopics.

Meme of the Day

Just think of all the great financial crime movies we’re gonna have in 5 years.. 🙃

Crypto 101

Wash Trading: This is an illegal form of market manipulation in which an entity buys and sells the same financial asset to create a false impression of market activity.

This is an old, illegal financial trick that has unfortunately become just as, if not more prevalent in crypto as it is in the traditional stock market.

Changpeng Zhao’s alleged activities with Merit Peake, if proven true, would be a textbook case of wash trading.

The Last Sip

Here are three events sure to happen on Changpeng Zhao’s first day in an American prison.

• He gets a stick-and-poke tattoo of the Binance symbol and “Noncompliant” across his chest in Old English script.

• He teaches his cellmate how to “crypt-walk.”

• Inmates gather in the cafeteria to watch Changpeng Zhao and Sam Bankman-Fried engage in the weakest arm-wrestling match of all time.

Stay Caffeinated,

Coffee & Crypto Team

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DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.