The SEC is suing Binance and CEO Changpeng Zhao for violating securities regulation

• The SEC is suing Binance and its CEO, Changpeng Zhao.
• The WSJ reported the lawsuit accuses the world's biggest crypto exchange of operating an illegal exchange.

The US Securities and Exchange Commission on Monday sued Binance and its CEO, Changpeng Zhao.

The Wall Street Journal reported that the lawsuit accuses the world's largest cryptocurrency exchange of breaking US securities rules and for operating an illegal exchange.

The SEC alleged that Binance diverted customers' funds to a trading firm called Sigma Chain that was under Zhao's control. The regulator also said Sigma Chain conducted fraudulent trades to artificially inflate Binance's volume.

The Journal added that the lawsuit has been filed in federal court in the District of Columbia.

In a blog post, Binance said it was disappointed by the lawsuit, adding that it had recently been in "good-faith discussions" to reach a settlement that would've resolved the SEC's probe.

"While we take the SEC's allegations seriously, they should not be the subject of an SEC enforcement action, let alone on an emergency basis," Binance said. "We intend to defend our platform vigorously. Unfortunately, the SEC's refusal to productively engage with us is just another example of the Commission's misguided and conscious refusal to provide much-needed clarity and guidance to the digital asset industry."

Binance.US also responded, disputing the SEC's claims in a Twitter post.

"For nearly two and a half years, Binance.US has engaged in good faith with the SEC. All along, the objective of our engagement has been consistent: work constructively toward a clear, practical regulatory framework that enables businesses like ours to grow, create jobs, and provide American consumers safe access to digital assets," the post reads.

"Simply put, today's filing is unjustified by the facts, by the law, or by the Commission's own precedent."

Binance also denied any allegations that user assets on Binance.US were at risk and said all user assets on Binance and affiliates, including Binance.US, are safe and secure.

In February, the Journal reported the SEC was looking into the relationship between the US arm of Binance and two trading firms with ties to Zhao.

Sigma Chain and Merit Peak acted as market makers that trade cryptocurrencies on the Binance.US exchange. One area of the investigation's focus was how Binance.US disclosed to customers its links to the trading firms, the report said.

The agency requested information about Sigma Chain and Merit Peak from Binance.US, which is the subject of an existing enforcement investigation, sources told the Journal.

The SEC lawsuit is the latest legal headache for Binance. In March, the Commodities Futures and Trading Commission sued the company, alleging among other things that staff knew compliance efforts were just "for show" and that it was possibly facilitating transactions by Palestinian militants and Russian criminals.

Binance has denied the CFTC's allegations.

Meanwhile, the Justice Department also is investigating Binance. Federal prosecutors have looked into US hedge funds' dealings with the cryptocurrency exchange, according to a Washington Post report in January.

Several American investment firms have received subpoenas, directing them to send records of communication with Binance to the US attorney's office for the Western District of Washington in Seattle.

In December, Reuters reported that Binance is being investigated by the Justice Department of over possible unlicensed money transmission and criminal sanctions violations.

This is a developing story. Check back for updates.