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Don’t believe the ‘crypto’ hype: SEC wins partial victory over Binance.US

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The U.S. Securities and Exchange Commission (SEC) won a solid TKO over Binance, despite the digital asset exchange’s desperate post-ruling efforts to claim victory.

On June 28, Judge Amy Berman Jackson of the U.S. District Court for the District of Columbia issued a memorandum opinion on the 13 charges in the SEC’s civil complaint against Binance. The suit, filed in June 2023, accused Binance, Binance.US, and Binance founder Changpeng ‘CZ’ Zhao of engaging in an “extensive web of deception, conflicts of interest, lack of disclosure and calculated evasion of the law.”

Jackson’s opinion dismissed one charge outright and partially dismissed two others while allowing the remaining charges to proceed. The ‘crypto’ sector gave a mighty cheer at Jackson’s partial dismissal of count one, which involved Binance’s initial coin offering (ICO) for its in-house BNB token, as well as the secondary sales of BNB on exchanges.

Jackson ruled that the BNB ICO did indeed qualify as an ‘investment contract’ under the Howey test for identifying securities. For one thing, Binance’s 2017 white paper called BNB purchases “investors” and touted the skills of the company’s management team as necessary for making Binance a success.

As such, “investors purchased coins with an expectation of profit, in the form of future appreciation, that would derive from a common enterprise dependent upon the managerial and entrepreneurial efforts of others.”

However, Jackson qualified this view by saying that “the question as to what motivated the reasonable purchaser at the time may prove to be a close one.” The fact that Binance offered BNB purchasers discounts on exchange fees “could support a contrary finding at a later stage in these proceedings that it was the ability to utilize the BNB to obtain discounts that served as the incentive for participation in the ICO.”

Jackson made a similarly fence-sitting ruling regarding Binance’s post-ICO BNB sales, rejecting Binance’s motion to dismiss while hedging that this rejection “does not mean that all questions have been put to rest.”

As for secondary sales of BNB on exchanges, Jackson noted two recent rulings in other federal court cases involving the SEC v. other companies and other tokens, specifically, Ripple Labs’ XRP and Terraform Labs’ UST and LUNA.

In the Ripple case, U.S. District Judge Analisa Torres ruled last summer that ‘programmatic’ sales of XRP to retail customers via exchanges weren’t in violation of U.S. securities law. But before the year was done, U.S. District Judge Jed Rakoff rejected Torres’ reasoning in his summary judgment against Terraform, saying he wouldn’t “draw a distinction between these coins based on their manner of sale.”

Jackson said she was “inclined to agree” with Torres, adding that while the SEC might be able to establish that some secondary sales “meet the criteria of an investment contract,” the agency’s “reliance on the assertion that ‘[t]he crypto assets are the embodiment of the investment contract,’ and its argument at the hearing about the nature of the technology and the interdependence of the platform and the performance of every token, is not enough, standing alone, to bring secondary sales of BNB under the investment contract rubric.”

Jackson says the SEC’s position “marks a departure from the Howey framework” and offers “no clear differentiating principle between tokens in the marketplace that are securities and tokens that aren’t.”

Jackson also found fault with the SEC’s litigation history (“case by case, coin by coin, court by court”), saying it isn’t the most efficient process and “risks inconsistent results that may leave the relevant parties and their potential customers without clear guidance.” In this case/coin/court, the portion of count one dealing with BNB’s secondary sales on exchanges was dismissed.


Jackson dismissed count two, which claimed that Binance engaged in the unregistered offer and sale of BUSD, the Binance-branded stablecoin that was issued in partnership with New York-based Paxos Trust.

Jackson ruled that the SEC failed to “plausibly allege that Binance offered and sold BUSD as an investment contract.” The deal between Binance and Paxos involved Paxos investing the fiat reserves supporting issued BUSD in “profit-generating opportunities,” the net returns of which were to be split evenly between the two companies.

Jackson said nothing in this arrangement would lead BUSD purchasers to believe that the interest generated on the dollars they paid to acquire BUSD “were to be deployed, through the issuers’ managerial and entrepreneurial efforts, to generate a return for [the customers’] benefit.”

The SEC failed to prove that the deal between Binance and Paxos “advanced the fortunes of those who bought the BUSD tokens, or that they reasonably expected to share in the companies’ profits in the form of a return on their investment.” Therefore, Jackson found that the SEC’s complaint “does not plausibly allege that Binance offered and sold BUSD as an investment contract under the Howey test.”

It’s a somewhat moot point, given that New York’s Department of Financial Services (NYDFS) ordered Paxos to halt further issuance of BUSD in February 2023. The NYDFS gave its order after determining that Binance had issued over $1 billion worth of its own version of BUSD that had no fiat reserve backing whatsoever. BUSD’s market cap swiftly fell from around $16 billion to less than $100 million over the next 12 months.

Three times a shady

Jackson partially dismissed count three, which addressed Binance’s BNB Vault and Simple Earn programs, which the SEC claimed were marketed to customers as “profit-making opportunities.”

BNB Vault was described as a “yield aggregator” for multiple projects affiliated with the token. Jackson said this “appears to be a way for coin holders to invest, as opposed to just use, their crypto assets, and they reaped their rewards by participating jointly in a set of specific programs that would be the source of their return.” In other words, it’s an investment contract, so the SEC’s complaint against BNB Vault will proceed.

But the case against Simple Earn won’t proceed. Simple Earn customers received interest on the tokens they ‘lent’ to Binance, with the amount of interest varying according to the type of token and the duration of the loan. Binance stated that it would use its “managerial expertise” to profit off the loaned tokens through “a variety of purposes,” including on-chain staking, other loans, and/or other operational purposes by other business units within Binance.

According to Jackson, “[n]ot every ‘profit-making opportunity’ is an investment contract, and the allegations concerning Simple Earn do not describe a scheme or transaction in which investors were urged to put their money in Binance’s hands so that they could share in the return that Binance would generate through its managerial or entrepreneurial efforts.”

And while BNB holders had an expectation of reward from their loans, “the hallmarks of the ‘common enterprise’ and the necessary connection between the anticipated returns and the offeror’s managerial or entrepreneurial efforts are absent.” There’s also no suggestion that loaned tokens “would be put towards the enhancement of the vaunted Binance ‘ecosystem’ or any other enterprise, or that the interest rate was dependent on that enterprise’s success.”

Take the L

In response to Jackson’s opinion, Binance issued a blog post with the following headline: “U.S. Federal Judge Rejects Main Claims by SEC Against Binance.” Um, no.

For starters, in addition to sustaining the charges involving BNB Vault and the BNB ICO, Jackson also sustained the charges that Binance engaged in fraudulent wash trading, lied about blocking U.S. customers from the exchange, misled customers regarding non-existent trading controls, improperly commingled and diverted Binance.US customer deposits to international entities under CZ’s control, etc. Oh, and the SEC can indeed go after CZ as a ‘control person’ of Binance.US, despite his refusal to set foot on U.S. soil (that is, until recently). But yeah, like Binance said, total exoneration.

Fox Business journo Eleanor Terrett called Jackson’s BNB ruling “a big win for clarity over secondary market sales of digital assets.” But as Jackson specifically stated in her ruling, “no one should read this case as deciding that crypto assets themselves are or are not ‘securities;’ that is not the question presented.”

Jackson also stated that the U.S. Supreme Court has upheld that the statutory definition of ‘investment contract’ “must be read broadly to address the variety of investment vehicles and money-making schemes that could not possibly have been foreseen in 1934 when the Securities Act was passed.”

The Securities Act defined ‘security’ as including “many documents in which there is common trading for speculation or investment … [T]he reach of the Act does not stop with the obvious and commonplace. Novel, uncommon, or irregular devices, whatever they appear to be, are also reached if it be proved as matter of fact that they were widely offered or dealt in under terms or courses of dealing which established their character in commerce as’ investment contracts,’ or as ‘any interest or instrument commonly known as a ‘security.'”

Jackson also delivered a verbal backhand to Binance’s argument that “an ‘investment contract’ must involve some sort of contractual relationship or arrangement between the offeror and the purchaser.” Tongue firmly planted in cheek, Jackson noted that this argument “has been foreclosed by Supreme Court and Circuit precedent, and indignation alone cannot open that door.”

Nowhere near over

The next hearing in this affair will be on July 9, and Binance.US, for one, says it’s ready to rumble. In a July 1 tweet, the company claimed it was “prepared” for Jackson’s rejection of nearly all of Binance’s motions to dismiss. Binance.US remains “confident” that “the SEC’s case is unsupported by the facts or the law, and that the Commission lacks the very authority it is seeking to wield in bringing its action against us.”

There’s no real way that Binance.US couldn’t be prepared, as it’s certainly not overburdened by handling customer transactions at present. On July 2, the exchange’s 24-hour trading volume was a mere $6.7 million while U.S. rivals Coinbase (NASDAQ: COIN) and Kraken handled $1.8 billion and $535 million, respectively.

Speaking of Coinbase, on July 1, the company filed a letter with U.S. District Judge Katherine Polk Failla, who is overseeing the company’s own fight with the SEC for operating as an unregistered securities exchange, broker, and clearing agency. The letter looks to piggyback on Jackson’s BNB secondary sales ruling in the hope of convincing Failla to rethink her rejection of Coinbase’s plea to dismiss the SEC’s case against it.

On July 2, Ripple filed its own letter with Judge Torres seeking to convince her that this (alleged) new secondary sales reality means Ripple’s past transgressions don’t “warrant harsh remedies.” The SEC has sought to impose a $2 billion penalty on Ripple, while Ripple’s counter-offer was a mere $10 million.

At this point, the SEC’s opponents might be content to just hang on long enough for the Supreme Court to ride to their rescue, perhaps by declaring that the SEC is illegal and chairman Gary Gensler is guilty of treason or something. Given what rulings have emerged from the Court over the past week or so, anything’s possible.

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