Highlights:

  • In a US federal court ruling, Judge Amy Berman Jackson dismissed several key claims by the US Securities and Exchange Commission (SEC), including the claim that cryptocurrency tokens are securities.

  • The court ruled that the SEC did not allege facts indicating that secondary market sales of BNB tokens on cryptocurrency exchanges were securities transactions.

  • The court also rejected the SEC's argument that Binance's fiat-backed stablecoin, BUSD, be classified as an investment contract.

  • Although some of the SEC's claims were dismissed, the court allowed some claims to proceed at this point. However, we expect the SEC to face significant challenges in proving them.

In a blow to the SEC's ongoing efforts to regulate through enforcement actions, the District Court of Columbia in the United States issued an opinion that dismantles several key pillars of the SEC's ill-advised enforcement campaign on cryptocurrencies.

The court's decision to dismiss several of the SEC's lawsuits against Binance, the world's largest cryptocurrency exchange by volume, marks an important moment in the ongoing battle between regulators and the rapidly evolving cryptocurrency market.

These are the court's critical findings:

The Meaning of "Investment Contract"

The court's opinion dismissed several of the SEC's central arguments. At the heart of the ruling, the SEC's broad assertion that cryptocurrency tokens are themselves investment contracts subject to SEC oversight was rejected. This stance, a cornerstone of the SEC's efforts to regulate the cryptocurrency market through enforcement actions, was considered legally unsustainable. The court found that the SEC's approach confused the issues and ignored controlling precedent from the United States Supreme Court. The court also emphasized that the focus should be on whether the circumstances surrounding each transaction make it a securities transaction. The focus should not be on the tokens themselves, which are not securities.

BNB Sales on Secondary Cryptocurrency Exchanges

Another significant aspect of the ruling was the dismissal of the lawsuit alleging that secondary market sales of BNB tokens on cryptocurrency exchanges classify as securities transactions. This decision is significant as it recognizes the limitations of the SEC's ability to carry out its unbridled enforcement actions against the cryptocurrency industry, especially exchanges, for their role in facilitating secondary trading. The court held that the SEC failed to allege that buyers in secondary market sales acquired BNB with the expectation of profit, rather than for other purposes, which is a key criterion for passing the Howey Test (a legal framework outlined by the Supreme Court to determine whether a transaction qualifies as an investment contract).

Stablecoin BUSD

The court dismissed the SEC's lawsuit alleging that Binance's fiat-backed stablecoin, BUSD, was sold as an investment contract. The court noted that BUSD was marketed as a stablecoin, with no facts suggesting that investors expected it to increase in value due to Binance's efforts. The court also noted that another stablecoin had been deemed not a security by the United States Department of Justice. The court recognized the need for consistency in dealing with these assets and noted that it could be much more difficult to pass the Howey Test when it comes to transactions involving stablecoins. In our view, the fact that different US agencies are taking inconsistent approaches towards stablecoins creates deep uncertainty in the market and highlights a significant failure of the rule of law.

Remaining SEC Claims

While this ruling is a significant victory for Binance and the cryptocurrency industry as a whole, some challenges remain. The court allowed some of the SEC's lawsuits to move forward, such as the SEC's lawsuit alleging that direct sales of BNB are securities transactions, as the court must assume the allegations are true at this stage of the process. However, the burden of proof is on the SEC to prove, among other things, that customers purchased these tokens as investments and not for other uses.

This decision is more than a legal victory for Binance; recognizes that there are critical limits to the SEC's regulatory authority over the cryptocurrency industry. The court appropriately criticized the SEC's decision to litigate the multibillion-dollar industry using a “case by case, coin by coin, court by court” approach, which creates inconsistent results and ambiguities.

This decision is a positive step towards protecting the integrity of the cryptocurrency market and calls for fair and consistent regulation so as not to hinder growth and innovation. As this case progresses, Binance remains steadfast in its commitment to defend itself against the SEC's over-the-top and reckless attempts to regulate nearly the entire cryptocurrency market.

Further reading

MiCA stablecoin rules: What they mean and how Binance is complying

Binance Announcement: Agreement with US Regulators 

Eliminating borders: Globally harmonized regulation for the digital economy