In last week's summary judgment hearing in the Securities and Exchange Commission (SEC) versus Binance, the judge posed a simple yet confounding question: "What is the difference between a crypto asset that is a security and a crypto asset that isn't?"
Judge Amy Berman Jackson, with a sly twinkle in her eye, posed this question during the rollercoaster hearing of Binance’s motion to dismiss the SEC’s case against it, a legal ballet dancing over statutes of limitations, jurisdictional disputes, and the central question of whether Binance's BNB exchange token qualifies as a security.
During the hearing, Her Honour echoed the industry's frustration with the SEC's failure to give clear guidance defining the boundaries of securities laws in relation to digital assets. Her Honour aimed a pointed question at the SEC:
What is the boundary of your definition [of a security]? And don't just say Howey.
For the uninitiated, the "Howey" test hails from a 1946 court decision, concerning an investment scheme involving orange groves in Florida. The application of the so-called "Howey test" that derives from that case has been the subject of heated debate over several years.
Jennifer Farer, an attorney representing the SEC, acknowledged the absence of a clear delineation between a token that is a security and a token that is not, stating "I know that the court may be frustrated that there's no bright line." The lack of precise regulatory guidance has been a recurrent challenge for both the SEC and the crypto industry, leading to regulatory actions of varying outcomes and casting a cloud over the development of Web3 technologies.
Paul Grewal, Chief Legal Officer of Coinbase (which is fighting its own battle with the SEC), pointed out via X that the SEC contradicted itself in the Binance case when compared to similar arguments in the Coinbase case:
In a regulatory landscape where precision is paramount, this contradiction highlights the confusion over what the SEC have consistently maintained are clear laws. Despite the SEC's protestations, it has faced a series of setbacks in recent cases seeking to enforce those laws, notably the high-profile loss against Ripple last year.
Despite Her Honour's questioning of the SEC's case, she also seemed underwhelmed by Binance's defence of its ICO. The SEC's suit, a 13-count pleading featuring allegations ranging from failure to register as a securities exchange to fraud carries on despite Binance's settlement with the US Department of Justice and the Commodity Futures Trading Commission on other charges which resulted in a USD $4.3 billion settlement and a guilty plea from Binance founder and former CEO Changpeng Zhao.
Alongside Coinbase's defence of its case against the SEC, which was also before the Courts recently, Her Honour's decision will carry heavy implications. The heated debate underscores the need for legislative action to give clarity to the crypto industry while ensuring appropriate protections for consumers.
In Australia, ASIC has similarly sought to test the boundaries of its jurisdiction by pursuing enforcement actions against the likes of Finder Wallet and Block Earner alleging that certain crypto-asset related offerings involved the offer of financial products.
As the gears of justice turn slowly, it may be several years before the Courts can provide sufficient clarity to industry and consumers. These matters should not be left to the judicial system if regulators wish to provide effective regulatory protections, avoiding jurisdictional arbitrage while keeping pace with technology.
For the time being, all eyes are fixed on the outcome of the Binance and Coinbase cases, which are set to make significant precedent for the crypto industry and beyond whatever the eventual outcome.
Written by Steven Pettigrove and Luke Higgins