The US Securities and Exchange Commission (SEC) alleged Binance.US to have orchestrated wash trading in a lawsuit against the cryptocurrency exchange. Recently, a Wall Street Journal report revealed internal communications of the company, showing Binance’s Founder and CEO, Changpeng Zhao, was aware of the wash trading on the US arm.

“That was ourself, I think,” Zhao said in an internal message after the launch of Binance.US, which handled about $70,000 in trades in the first hour.

Binance.US Has Been Involved in Wash Trading

Wash trading is the practice of inflating the trading volumes of exchange by internally executing buy and sell orders. This creates a false impression of demand on the exchange, ensuring liquidity. Such practices are illegal, but many crypto exchanges, with little to no regulatory oversight, regularly inflate their trading volume. According to a study in the journal of Management Science, about 70 percent of the crypto trading volumes in the second half of 2019 came from wash trading.

In the lawsuit against Binance, its two US affiliates, and the CEO, Zhao, the SEC charged the exchange and other parties for wash trading on the US platform using dozens of user accounts that were held by Sigma Chain, a Swiss trading company controlled by Zhao.

Though the SEC did not specify any name of who might have conducted the wash trading, it highlighted that Zhao directed dozens of Binance employees to conduct Sigma Chain operations.

However, Binance denies the wash trading allegations.

“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,” Binance's spokesperson said.

2/11 The SEC's allegations against Binance, https://t.co/BcnoGtsaNV, and CZ shook the industry. One notable accusation was their involvement in Wash Trading, particularly on BNB US. The trading vol of altcoins on Binance surpassed BTC and ETH, which is unusual for U.S. exchanges pic.twitter.com/mFvYVcq9vp

— DeFi NTR (@DeFi_NTR) July 16, 2023

Wash Trading in Crypto

Wash trading has been rampant in crypto. Apart from Binance, other popular crypto exchanges have faced allegations of such illegal practices. In 2021, the US Commodities Futures Trading Commission (CFTC) slapped Coinbase with a monetary penalty of $6.5 million for inaccurate reporting as well as wash trading on its institutional platform.

Meanwhile, Binance has been facing a severe regulatory backlash in the US and abroad. It shuttered its derivatives operations in Australia following an investigation by the regulator, while in Europe, it deregistered entities in Cyprus and the UK and exited The Netherlands. The exchange is facing a probe in France for illegal operations and anti-money laundering violations.