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A Second Look at Third-Party Token Allegations in the SEC Case Against Binance
Last week, a federal judge called a hearing in the U.S. Securities and Exchange Commission’s case against Binance, after publishing his ruling on Binance’s motion to dismiss the SEC’s lawsuit.
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Last week, a federal judge said he would review his ruling in the U.S. Securities and Exchange Commission (SEC) case against Binance and its affiliated entities (i.e. Binance.US and founder Changpeng Zhao) after lawyers for the world’s largest cryptocurrency exchange said they had interpreted the ruling in a specific way that was advantageous to them.
During a hearing on July 9, Binance’s lawyers said they had interpreted Judge Amy Berman Jackson’s June 28 ruling on Binance’s motion to dismiss the SEC case as moving third-party tokens (digital assets purportedly SEC-unregistered securities issued by various companies not named Binance) out of the case. The judge said that was not his intent, which set off a nearly hour-long back-and-forth over whether he had sufficiently addressed both Binance’s and the SEC’s written arguments on these specific tokens.
The SEC’s June 2023 lawsuit against Binance alleges that the exchange offered and sold Binance’s token, BNB, as an unregistered security; that it sold its stablecoin, BUSD, as an unregistered security; that it failed to register as a broker, clearinghouse, or exchange; that its staking service violated federal securities laws; and that it commingled customer funds. As part of its charges, the SEC named 10 different cryptocurrencies, including solana (the others are listed below), which it said were unregistered securities.
That’s the status of the specific claims for the 10 tokens that were discussed at last week’s hearing, and it’s hard to say exactly how that might play out or what the implications are for the case. On the one hand, if the judge rules that third-party tokens should be removed from the specific claims against Binance, that’s one less thing the exchange has to defend itself against and could limit or otherwise shape the scope of discovery. On the other hand, the judge seemed to indicate that he didn’t believe his order moved the tokens out of the case, which goes the other way in terms of how much discovery the SEC might be entitled to.
On his 28th June dominantJudge Jackson said the SEC had made plausible allegations against Binance, Binance.US and Zhao related to staking, the initial coin offering, and ongoing direct sales of Binance’s BNB token, the BNB vault (a staking and rewards program), and failure to register, as well as fraud. The charges against Binance’s Simple Earn savings accounts, its BUSD stablecoin, and secondary sales of BNB by parties other than Binance were dismissed.
The SEC said Binance specifically listed 10 tokens it considered securities, as examples of how the exchange was violating federal securities laws by being a broker, dealer, and clearinghouse: SOL, ADA, MATIC, FIL, ATOM, SAND, MANA, ALGO, AXS, and COTI. In its motion to dismissBinance argued that the SEC could not plausibly argue that they were securities, saying they did not meet the principles of the Howey test.
Two of Binance’s arguments – that the claims were dismissed under the Major Questions Doctrine and that a formal contract was required – had already been “soundly rejected,” the judge said during the hearing.
SEC attorney Matthew Scarlato said Binance’s arguments were addressed in the regulator’s report opposition memowhich rejected Howey’s arguments put forward by the exchange and said that the tokens were also tied to a joint venture in which investors could reasonably expect to make a profit.
Ultimately, the judge said he would review both Binance’s motion to dismiss, filed in September, and the SEC’s notice of opposition, filed in November, to revisit the arguments made about third-party tokens.
At last week’s hearing, the two sides (and the judge) agreed to set a July 29 deadline for them to jointly submit a proposed timetable for next steps, which could involve other ongoing investigative activities.
The judge also took aim at bloggers who he said had misinterpreted his opinion as a “big ruling” on stablecoins or secondary cryptocurrency transactions in general, suggesting that it was narrowly focused on the specific case before him.
“I have not been asked to decide and I have not decided whether a stablecoin can ever be an investment contract, nor has the judge ruled that secondary token transactions by third parties can never be investment contracts,” he said toward the end of the hearing.
If you have any ideas or questions about what I should discuss next week, or any other feedback you’d like to share, feel free to email me at nik@coindesk.com or find me on Twitter @nikhileshde.
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