The U.S. arm of China-based Binance — the world’s biggest crypto exchange by trading volume — is under a U.S. federal investigation for alleged failure to disclose links to crypto trading firms. The Securities and Exchange Commission is probing the trading affiliates of Binance.US. 

Investor protection is the mission of the SEC regulatory agency.

Binance.US is a U.S. partner of Binance, which was founded in Shanghai, China, in 2017 by Chinese-Canadian businessman Changpeng “CZ” Zhao. The original platform stopped accepting U.S. users in 2019 and instead partnered with a U.S.-based version of its platform called Binance.US. 

Investigators are interested in two trading firms with ties to Binance’s founder, sources told The Wall Street Journal. The two trading firms, Sigma Chain AG and Merit Peak Ltd., act as market makers that trade cryptocurrencies on the Binance.US exchange. A market maker is an individual participant or member firm of an exchange that buys and sells securities for its own account.

The SEC believes that Zhao controls both Sigma Chain AG and Merit Peak Ltd. If it’s true, this would be a violation of SEC regulations.

According to its Binance.US website, affiliated market makers may trade on Binance.US, though the company doesn’t name which firms might do so.

Binance.US is popular in the U.S. because it offers investors lower fees than many other cryptocurrency exchanges. But since its inception, the company has faced regulatory scrutiny. 

When it comes to security, storage options, and customer assistance, Binance.US is known to be much less transparent than many competitor exchanges, Time reported.

As recently as May 2021, Binance was under investigation by the U.S. government for tax fraud and money laundering, according to Bloomberg. 

Zachary Tindall, a spokesman for Binance.US, declined to comment on the SEC investigation and any relationship with the two trading firms. “Binance.US is committed to upholding the highest standards of compliance,” he said.

Another Binance spokesman, Stephen Milton, told the Wall Street Journal that as a private company, Binance doesn’t need to disclose details of its investor or corporate structure. “However, that information is shared with regulators when requested,” Milton said. 

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The SEC investigation of Binance could be a sign of a severe regulator crackdown, some observers said. The SEC has already threatened to sue companies offering crypto lending and it has already brought enforcement actions against trading venues that didn’t disclose they had affiliates trading on their platforms.

Now, it’s taking on a crypto giant based in China. 

To bring an enforcement action against Binance’s U.S. arm, the SEC needs to prove that it has jurisdiction over some cryptocurrencies that Binance.US has offered, according to Time.

The SEC originally subpoenaed Binance’s U.S. arm in late 2020, seeking information about who controls Binance, how it generates money, what disclosures it makes to customers, and whether trading on Binance.US is independent from activity on the bigger, global exchange, according to the subpoena.

Photo: STRF/STAR MAX/IPx 2021 3/12/21 Binance under investigation for Bitcoin (BTC USD) cryptocurrency price trading. STAR MAX Photo: Binance app photographed off an iphone 8 pro.