S Pettigrove and M Bacina
Binance US sued over Luna/UST meltdown
Updated: Jun 23, 2022
Last Monday, a class action complaint was filed against Binance US and its CEO, Brian Shroder, in the United States District Court in San Francisco. The complaint alleges that the Luna token and Terra USD (UST) stablecoin were unregistered securities and the exchange had advertised those products.
It is alleged that Binance.US unlawfully offered and sold unregistered securities in violation of the US Securities Act and operated as an unregistered exchange and/or broker/dealer in violation of the US Securities Exchange Act. The plaintiffs are also claiming violations of the California Corporations Code.
The complaint refers to statements allegedly made by Binance.US in relation to UST, including that UST staking was “High Yield, Safe & Happy Earn” and which they allege may have suggested to users that UST was “fiat-backed”. However, the complaint does not directly pursue causes of action based on misrepresentation or misleading conduct.
The plaintiffs are seeking orders declaring that Binance.US and Shroder violated federal and state securities laws and for damages and other relief. They are also seeking injunctive relief enjoining Binance US from offering UST for purchase or sale and/or continuing what they assert are the unlawful practices alleged in the complaint.
The Binance US complaint raises a number of legal issues which may have broader ramifications for cryptocurrency exchanges. If the Luna token or UST are found to be securities in the US (financial products in Australia) and as a result whether Binance US would have been required to be licensed as an exchange or broker/dealer would have serious impacts on other exchanges.
It is important to note that the claim is just that, and no finding of any wrongdoing has occurred. Binance will have time to put on their defence in due course.
In the meantime, the US Securities and Exchange Commission continues to pursue Ripple Labs, Inc. and two of its executives for alleged violations of the US Securities Act in connection with the offering of the Ripple token (XRP) which the SEC asserts was an unregistered security.
Crypto promotions have also been a hot topic for regulators around the world in recent months with several jurisdictions taking action to address risky advertising. These include the United Kingdom, Spain and Singapore.
Australia has a well-developed consumer law regime, including restrictions on misleading and deceptive conduct which extend to nearly all other goods and services, including the promotion and sale of crypto-assets. The Australian Securities & Investments Commission has said it has delegated powers from the Australian Competition and Consumer Commission (ACCC) to, in coordination with the ACCC, respond to potentially misleading or deceptive conduct relating to crypto-assets which affect Australian consumers, but to date we have not seen any of these delegated powers used.