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  • J Huang and M Bacina

US Court rejects SEC's token theory

On 28 June 2024, Judge Jackson of the US District Court for the district of Colombia issued a lengthy order resolving the pending motion to dismiss complaints by the Securities and Exchange Commission (SEC) in SEC v Binance. While the Court allows the majority of SEC's claims to proceed, it also dismissed several of the SEC’s core arguments.

The SEC’s June 2023 charges raises thirteen claims in relation to violating US federal securities laws against Binance Holdings, its founder Changpeng Zhao, and two US-based entities, BAM Trading and BAM Management (together, Binance).

Among the complaints, SEC alleged that:

  • Binance offered unregistered securities to the general public in the form of the its BNB token and Binance-linked BUSD stablecoin;

  • Binance's staking-as-a-service violated securities law, following the reasoning in SEC v Coinbase; and

  • Binance entities failed to register as a clearing agency, a broker-dealer and an exchange with the SEC.

The Court allowed most of the claims to proceed, including claims based on Binance’s own post-ICO (i.e. Initial Coin Offering) sales of BNB. However, the Court dismissed claims based on other parties’ subsequent sales of BNB (i.e. secondary sales), as the Court found the SEC had not plausibly alleged that purchasers on secondary markets expected Binance to use their “investment” in buying BNB to generate profits.

The Court also found that Binance’s stablecoin BUSD was not credibly alleged to be offered or sold in a securities transaction and rejected the SEC’s allegation that Binance’s promises to develop the BUSD “ecosystem” would lead purchasers to expect an increase in value “when the alleged defining feature of the ‘stablecoin’ was that its value would remain constant.”

Another key issue at the heart of the ruling was the rejection of the SEC’s broad assertion that the crypto tokens themselves are investment contracts subject to SEC oversight. Jackson J wrote that,

The Court notes that several of the district courts presented with SEC enforcement actions involving cryptocurrencies have taken pains to differentiate the alleged investment contracts from the tokens themselves... The Court finds these observations to be clarifying and persuasive...'"

Binance heralded this ruling as an important clarification on the legal position and a blow to SEC's case to regulate the crypto market by enforcement, saying:

The court found that the SEC’s approach muddied the issues and ignored controlling United States Supreme Court precedent. The court also emphasized that the focus should be on whether the circumstances surrounding each transaction renders it a securities transaction.  The focus should not be on the tokens themselves, which are not securities.

In light of the Court's ruling on secondary sales of crypto assets, Coinbase and Ripple Labs are both seeking to include this decision in their cases with the SEC. This week, Coinbase filed a new motion to support an appeal of SEC v Coinbase, saying:

[The decision in] Binance further supports requiring the SEC to engage in rulemaking regarding digital assets

Paul Grewal, Chief Legal Officer of Coinbase, posted on X (formerly Twitter) saying the fact that two US district courts reached very different views as to whether secondary transactions of crypto assets are securities transactions creates uncertainty for market participants, and is the result of SEC's litigation-focused approach to crypto regulation:

While some view the Binance ruling as a partial victory for Binance and the broader crypto industry, many challenges remain. The court allowed most of the SEC’s most serious claims to proceed (as the court is required to assume that the allegations are true at this stage of the proceedings when considering whether claims should be dismissed).

The burden of proof is on the SEC to demonstrate, among other things, that customers purchased these tokens as "investment contracts" rather than for other uses. The Court scheduled a hearing for this case on 9 July.

Written by J Huang and M Bacina


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