Binance Spars With U.S. Regulators Over Asset Freeze

A federal judge on Tuesday urged the Securities and Exchange Commission to strike a compromise with Binance that would allow the global cryptocurrency exchange to continue operating in the United States as it fights a civil fraud lawsuit filed by the regulator.

Last week, the S.E.C. charged Binance and its U.S. affiliate with mishandling customers’ deposits and lying to regulators. It also sought to freeze the company’s U.S. assets, a move that Binance claimed would force it to shut down in the United States.

At a hearing in Washington on Tuesday, Judge Amy Berman Jackson of the U.S. District Court for the District of Columbia asked the two sides to confer on a possible agreement over the asset freeze, arguing that they were closer to a deal than the rhetoric in their court filings suggested. Judge Jackson ordered them to continue negotiating and to submit a status update by Thursday.

She also expressed skepticism about the S.E.C.’s use of its enforcement powers to regulate the crypto world, calling it “inefficient and cumbersome.”

The moves against Binance are part of an increasingly aggressive regulatory crackdown on the crypto industry. A day after filing the Binance lawsuit, the S.E.C. also sued Coinbase, the largest U.S. exchange, for dealing in unlicensed securities.

That one-two punch rattled the industry, raising the specter of a yearslong legal battle over the future of crypto in the United States. Scrutiny has increased since November, when the FTX exchange collapsed overnight, leading to criminal charges against its founder, Sam Bankman-Fried.

The effort to freeze Binance’s U.S. assets stands out as one of the S.E.C.’s most aggressive steps so far to rein in the crypto industry. While previous actions have forced smaller crypto firms to pay fines or discontinue certain products, a victory over Binance could drive the world’s largest exchange out of the country entirely, accelerating a growing exodus of companies.

In court filings on Monday, lawyers for Binance’s American arm, Binance.US, argued that the S.E.C.’s proposed asset freeze would prevent the company from paying vendors, employees and suppliers, causing its operations to “quickly grind to a halt.”

“We’re not willing to accept a death penalty eight days into the case,” a lawyer for Binance.US said at the hearing.

Carl Tobias, a professor at the University of Richmond School of Law, said the request for an asset freeze may have been intended to send a message to the broader crypto industry. “It’s part of reasserting the S.E.C.’s authority to regulate in this area,” he said.

Binance.US oversees $2.2 billion in crypto holdings, according to the S.E.C. The freeze would have no effect on the company’s larger global exchange, which is already prohibited from operating in the United States.

Last week, the S.E.C. disclosed that it has been investigating Binance since the summer of 2020. A few months ago, the agency informed Binance that it was considering filing an enforcement action.

After the S.E.C. sued Binance last week, Binance.US said its banking partners would no longer provide crucial payment channels, forcing the exchange to stop offering trading in U.S. dollars.

The S.E.C. said in court papers that none of its moves should have come as a surprise to Binance and its chief executive, Changpeng Zhao, who is also a target of the lawsuit.

“Defendants knew that their conduct with respect to U.S. investors was illegal and risked U.S. government enforcement actions,” the S.E.C. said in a filing. “Instead of ceasing such illegal activity, Zhao and Binance doubled down.”

During the hearing Tuesday, Judge Jackson was not only skeptical of the S.E.C.’s using its enforcement powers to regulate the crypto industry, but said that Binance lawyers’ posture of surprise over the agency’s aggressive legal arguments “rang a little hollow.” She said many of the questions at the heart of the Binance case — including whether cryptocurrencies should be classified as securities — have been asked of the crypto industry for years.

At the end of the hearing, which lasted roughly 90 minutes, Judge Jackson suggested both sides come to an agreement on the S.E.C.’s request to freeze assets as soon as possible. “Something needs to be done,” she said.