The regulator wants to establish the relationship between Binance.US and two affiliate firms associated with Changpeng Zhao
Several US authorities have in the past, on more than one occasion, probed Binance over other compliance matters
The US Securities and Exchange Commission (SEC) is looking into two trading firms associated with crypto exchange Binance’s US arm. The financial markets regulator is said to be investigating the relationship between Binance.US and these firms which hold ties with Binance CEO and founder Changpeng Zhao.
According to a report published by The Wall Street Journal on Tuesday, Merit Peak Ltd and Sigma Chain AG are the entities in question. The two firms trade on Binance.US as market makers.
The WSJ detailed that the unnamed sources said that the regulator is seeking information on how the US subsidiary of the exchange notified customers on its relationship with the said firms. Notably, an SEC probe does not necessarily turn into enforcement action.
Crypto exchanges are only as strong as their market makers since they provide liquidity to the exchange. By buying and selling assets (regardless of the market condition), they enhance stability on the exchanges. Such firms make profits from the marginal difference between bid and offer prices.
On its website, Binance.US discloses that it allows associated market makers to trade on the exchange though it lists no particular names of such firms. The SEC is keen on disclosures, having previously brought action against companies that failed to divulge details on affiliates operating on their platforms.
Binance.US was formed in 2019 after the parent Binance exchange found it hard to navigate the regulatory weather in the US. However, as the Journal said, former executives were not quite sure where the funds the two firms traded came from.
Zhao’s ties with the firms
There exist close ties in the relation between Changpeng Zhao and the two companies based on historical data. Information obtained from corporate documentation and confirmed by former executives at the two firms shows that the Binance founder had control over Merit Peak and Sigma Chain as recently as last year.
The Cayman Islands-registered exchange has retained that it subscribes to the highest levels of compliance. Reps from the exchange have also said that it is not required to open up details on its corporate structure to the general public. However, it cooperates with requests by regulators to share information when asked to.
Binance had several tussles with regulatory entities around the world throughout the first and predominantly second half of last year. In May, the Department of Justice and IRS investigated the exchange over possible investor tax fraud and money laundering. The exchange was also reportedly probed by the CTFC in September over possible insider trading by the employees.