SEC and Binance Present Arguments on Digital Assets in Court

On January 22, hearings took place in the case of the SEC against the cryptocurrency exchange Binance. Both parties responded to the judge’s questions regarding the nature of digital assets.

The regulator filed a lawsuit against the trading platform and its former CEO, Changpeng Zhao, on June 5, 2023, bringing 13 charges, including the sale of unregistered securities. The agency classified 12 tokens, including BNB and the stablecoin BUSD, as securities.

Arguments

According to Binance’s lawyers, an asset can be considered a security if there is a real contract. However, District Judge Amy Berman Jackson countered, stating that case law allows for a broader definition.

The judge also criticized the defense’s description of the Howey Test.

“Quoting the provisions of the test, an investment contract is a contract, transaction, or scheme. One of three things. It does not mention a contractual transaction or scheme,” Jackson clarified.

Later, the judge asked the Commission’s lawyers about the criticism it received for unclear regulation in the crypto industry. In response, agency representatives disagreed with such statements, asserting that the SEC has issued relevant guidelines over the years.

“The Howey Test clearly demonstrates everything, and you do not need a regulator to specifically address and remind about violations of securities laws,” emphasized the SEC lawyer.

According to the agency, Binance’s promotion of its business and the tokens BNB and BUSD created reasonable expectations of profit for those who purchased these assets.

In contrast, Binance’s lawyers argue that the mere fact of promotion cannot be an indicator of securities, as any business engages in marketing.

Secondary Market

The hearings also addressed whether the sale of tokens on the secondary market should be considered alongside primary sales.

According to Binance’s team, secondary transactions on the exchange do not pool funds that are then invested in a common enterprise, and thus do not meet the criteria of the Howey Test.

However, the SEC argues that if a token possesses the qualities of a security, this is considered in any sale. Moreover, creating a secondary market for cryptocurrencies is a measure that helps increase their value, which buyers expect.

The Commission also equated BUSD to a security, as it was sold as a “package of services” allowing users to earn income from their assets on Binance.

The agency mentioned a simplified decision in December in the SEC case against Terraform Labs. At that time, the judge agreed with the agency and ruled that the stablecoin TerraUSD (UST) represented an investment contract, as it implied income through the Anchor protocol.

Previous Arguments

Binance’s lawyers once again attempted to invoke the “major questions doctrine” — a Supreme Court ruling that directs federal agencies to await a decision from the U.S. Congress on significant economic or political situations.

The company believes that the provision applies in this case. According to the lawyers, if the SEC wins the case, it could “extend its power” to any asset whose value increases.

Judge Jackson disagreed with the exchange’s argument:

“While this industry may be worth trillions of dollars, I am not inclined to think it fits the very narrow circumstances outlined in the doctrine.”

In December 2023, Binance challenged the legality of the SEC’s lawsuit. The company claimed that the Commission did not present plausible arguments for its claims regarding the unregistered sale of securities.

Back in November, Zhao pleaded guilty to violating sanctions and anti-money laundering laws. Binance will pay $4.3 billion as part of a settlement with the U.S. Department of Justice. Zhao also agreed to pay a $50 million fine and stepped down as CEO of the exchange.

However, the SEC was not part of this deal, and based on the agency’s testimony, it decided to “pursue” the already open case. The regulator believes the court should consider new facts in the company’s and its former head’s admission, which could lead to additional criminal charges.