Main topics of the post:

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

  • The court ruled that the SEC did not present 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, qualifies as an investment contract. 

  • Although some of the SEC's claims were dismissed, the court has allowed certain claims to proceed at this time. However, we expect the SEC to face significant challenges in proving these allegations.

In a setback to the SEC's ongoing efforts to regulate through enforcement, the United States District Court for the District of Columbia has issued a ruling dismantling several central pillars of the SEC's misguided campaign against cryptocurrencies.   

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

Here are the court's critical conclusions:

The meaning of "investment contract"

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

Secondary Market BNB Sales by Cryptocurrency Exchanges 

Another significant aspect of the understanding was the unfounded claim that secondary market sales of BNB tokens on cryptocurrency exchanges are classified as securities transactions. This decision is significant as it recognizes limitations on the SEC's ability to conduct its rampant enforcement actions against the crypto industry, especially exchanges, for their role in facilitating secondary trading. The court found that the SEC did not allege that buyers in secondary market sales acquired BNB with an expectation of profits rather than for other uses, which is a key criterion for passing the Howey Test (a legal framework outlined by the Supreme Court). cutoff for determining whether a transaction qualifies as an investment contract).

Stablecoin BUSD 

The court rejected the SEC's claim that Binance's fiat-backed stablecoin, BUSD, is sold as an investment contract. The court said that BUSD was marketed as a stablecoin, without facts demonstrating that investors expected it to increase in value due to Binance's efforts. The court also noted that another stablecoin was not considered a security by the United States Department of Justice. The court recognized the need for consistency in the treatment of these assets and noted that it can be much more difficult to pass the Howey Test when it comes to transactions involving stablecoins. In our opinion, the fact that different US agencies are taking inconsistent approaches to stablecoins creates severe uncertainty in the market and highlights a significant regulatory failure.

Other SEC allegations

While this understanding is a significant victory for Binance and the crypto industry as a whole, some challenges remain. The court allowed some of the SEC's claims to proceed, such as the SEC's claim that direct BNB sales are securities transactions, given that the court is required to assume the allegations are true at this stage of the proceedings. However, the burden of proof is on the SEC to demonstrate, among other things, that customers purchased these tokens as investments and not for other uses.

This decision is more than just a legal victory for Binance. It is a recognition that there are critical limits to the SEC's regulatory authority over the crypto industry. The court appropriately criticized the SEC's decision to litigate a billion-dollar market through a "case by case, coin by coin, court by court" approach, which creates inconsistent results and ambiguity. 

This decision is a positive step towards safeguarding the integrity of the crypto market and demands fair and consistent regulation so as not to stifle growth and innovation. As this case proceeds, Binance remains steadfast in its commitment to defending itself against the SEC's overzealous and ill-conceived attempts to regulate nearly the entire cryptocurrency market.