By Hannah Lang, John McCrank and Sinéad Carew
(Reuters) - Cryptocurrencies and shares in crypto and blockchain-related companies tumbled on Monday after the U.S. securities regulator sued crypto exchange Binance, another blow to the industry.
The U.S. Securities and Exchange Commission sued Binance and its CEO Changpeng Zhao for secretly controlling Binance.US as part of a "web of deception" to evade U.S. laws, among other charges. Reuters earlier reported that Binance controlled its US affiliate’s bank accounts, despite claiming it was independent.
The SEC also said Binance artificially inflated trading volumes on the platform, diverted customer funds and failed to restrict U.S. customers from its platform and misled investors about market surveillance controls.
Bitcoin, the world's biggest cryptocurrency was down 5.45% after falling to its lowest level since mid-March following the news. Binance's cryptocurrency fell 9.72%.
The charges filed in a federal court in Washington, D.C., are the latest in a string of enforcement actions brought by the agency in a bid to curtail the cryptocurrency industry, which SEC Chair Gary Gensler has described as "the wild West."
The SEC crackdown has prompted some crypto companies to increase compliance, spike products, and expand overseas, moves that some marketwatchers said would likely be accelerated by this latest action against the world's largest crypto exchange.
"This is yet another targeted attack that is devastating in the crypto ecosystem. Pretty soon, the SEC won’t have anyone left to sue," said John Reed Stark, a former chief of the SEC's Office of Internet Enforcement.
In statements, Binance said it had been cooperating with the SEC's probes and had "worked hard to answer their questions and address their concerns" including by trying to reach a negotiated settlement.
"With its complaint today, the SEC abandoned that process and instead chose to act unilaterally and litigate. We are disheartened by that choice," the company said.
The SEC's move to abandon a settlement and move to litigate underscores the aggressiveness with which it has approached the cryptocurrency industry, which the agency says has violated its rules on trading and securities issuance. The SEC did not immediately respond to a request for comment.
In April, the SEC charged crypto exchange Bittrex Inc with operating an unregistered securities exchange, broker and clearing agency, and settled with Kraken in February for $30 million over the exchange's U.S. crypto staking service.
Coinbase (NASDAQ:COIN) Global Inc disclosed in March that the SEC has threatened to sue the company over some of its products.
Coinbase and Kraken did not immediately respond to a request for comment. Bittrex declined to comment.
Many big crypto companies started out in the belief their products did not fall within the SEC's jurisdiction and say the rules are confusing. They are now "in a heap of trouble," said James Angel, a finance professor at Georgetown University.
"They’d better be hiring lots of the best regulatory counsel that money can buy, because they're going to need it."
Shares of Coinbase were down 9.1% on the news of the SEC's charges against Binance. Crypto miner Riot Platforms Inc was off 8.8% while Marathon Digital was down 8.4%, and Hut 8 Mining was off 4.6%.
Following some of the SEC's actions against crypto companies this year, several firms have invested in expanding their operations outside of the U.S. Both Coinbase and crypto exchange Gemini launched international exchanges for crypto derivatives in May.
Still, the regulatory actions in the U.S. "highlight the need to establish safeguards in these markets to meet the expectations of investors and customers," said Rajeev Bamra, senior vice president and head of decentralized finance and digital assets strategy at Moody’s Investors Service.
"Consequently, these charges have the potential to reshape the regulatory landscape for digital assets," he said.