Unlawful Solicitation

Level 4 - Turbo Autist

"An extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law.” - Gary Gensler

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Three-card monte is a classic confidence card game from the 19th century.

The game is simple, yet deceptive.

The basic premise involves three playing cards, typically two numerical cards and one face card.

Here's how it works.

The person running the game (the dealer) shows the players three cards, face up. Two of these cards are identical (often the black numerical cards, like 8 or 9), while the third one is different and serves as the target card (often a red face card, like a queen).

The dealer then quickly shuffles these cards face down, mixing them on a table or a flat surface, often with fast movements to confuse and distract the players.

Once the dealer stops shuffling, players are asked to bet on which card they believe is the target card.

If the player picks the right card, they win. If they select one of the identical cards, they lose.

Three-card monte isn’t a game of chance. It’s a game of skill. Skill of the dealer, that is.

You see, three-card monte is a notorious street scam.

The dealer, often working with a team of “enthusiastic players” to lure in bystanders, uses sleight of hand and misdirection to manipulate the outcome.

Even when a player picks the right card, the dealer can subtly swap it with one of the other cards to ensure the player loses.

This is why three-card monte is generally considered a scam rather than a fair game.

It's associated with the art of deception, fast hands, and the idea that "the hand is quicker than the eye."

The SEC has accused Binance and founder CZ of running their own three card monte. A multifaceted operation that circumvented regulatory requirements, like a dealer manipulating cards to keep the mark off balance.

This story starts with a spicy allegation that, while CZ and Binance were telling everyone that U.S. customers were persona non grata on Binance.com, behind the scenes, they were quietly rolling out the red carpet for big-spender American clients.

And if that wasn’t enough, the SEC also dropped the bombshell that Binance.US, which was supposedly a separate entity for the good old American investor, was actually under CZ and Binance's direction all along (let’s be honest, that would not be surprising).

The SEC accused Binance of playing a high-stakes game of three-card monte with customer assets. They allegedly shuffled these assets around, even diverting them to a little entity named Sigma Chain (not to be confused with Sigma Chad).

Binance and BAM Trading are accused of operating unregistered securities exchanges, broker-dealers, and clearing agencies.

They're also in hot water for the unregistered offer and sale of Binance's own tokens: BNB, BUSD, and certain crypto-lending products.

To be frank, we aren’t surprised by these charges. We’d discussed that there was high potential for CZ to get charged amongst ourselves (we probably mentioned it on DeFi Ed but didn’t dig through old articles to check).

Those of us in crypto at this point are not phased by any of this. A few months ago, DeFi Ed did a deep dive on Binance over at BTB and we weren’t exactly enthusiastic about Binance.

“We are operating as a fking unlicensed securities exchange in the USA bro” - Binance Chief Compliance Officer

The SEC also makes the accusation that BAM Trading and BAM Management US Holdings bamboozled investors with stories about their non-existent trading controls. There's also the issue of some allegedly shady trading antics by Sigma Chain, which apparently pumped up the trading volume of Binance.US.

Binance was quick to respond, asserting that the SEC's complaint attempts to "unilaterally define crypto market structure." They countered that they've always been committed to compliance and have taken necessary steps to keep pace with the rapidly changing regulatory landscape. Binance says the SEC's allegations hinge on a skewed and unjust interpretation of the rules and stifle innovation.

Binance states they have not violated any securities laws, and they won't let the charges go unanswered.

TLDR: they intend to fight.

First, A Warning: Coins Off Binance

Buried below paragraph 556 at the bottom of page 133 (yes, we read every word of these filings), the complaint shows the SEC are seeking

• asset freezes

• a verified accounting

• repatriation of assets; and

• the appointment of a receiver

So you might want to withdraw any funds held on Binance and use another exchange for any temporary transactions or on/off ramping.

DeFi Ed Opinion

Readers who have been paying close attention will note that the Binance charges reprise many of the allegations in the Wells Notice the SEC served on Coinbase:

• unregistered exchange, broker dealer, and clearing agency

• earn and staking schemes are unregistered securities

• trading of securities (crypto tokens) on the exchange

Coinbase’s lawyers Sullivan and Cromwell prepared a detailed legal rebuttal explaining why the exchange was not at fault.

Relevant to Binance are the arguments that secondary sales of crypto tokens do not implicate the exchange in dealing in unregistered securities; and that staking rewards are payment for services, not investment contracts.

These arguments are covered in our detailed anaysis of SEC v Coinbase.

However, there are some unique allegations. These include that Binance: