Author: Nikhilesh De, CoinDesk; Translated by: Deng Tong, Golden Finance
A federal judge overseeing the U.S. Securities and Exchange Commission’s case against Binance has ruled that most of the case can proceed but dismissed charges related to the sale of BUSD and secondary sales of BNB.
Secondary sales
Narrative
Late Friday, U.S. Judge Amy Berman Jackson ruled in the District Court for the District of Columbia that the SEC had laid reasonable charges against Binance, Binance.US, and Changpeng Zhao, and was willing to dismiss most of the charges against the companies. However, she did dismiss charges related to secondary sales of BNB by non-Binance sellers, charges related to the sale of BUSD, and charges related to Binance’s “Simple Earn” product.
Are secondary sales also investment contracts?
One question surrounding the application of securities laws to cryptocurrencies is whether secondary sales are also investment contracts. We have seen some decisions by local courts, but no decisions by appellate courts yet.
Judge Jackson’s ruling essentially maintains the status quo surrounding litigation around cryptocurrencies and securities — she ruled that the substantial issues doctrine does not apply, that the SEC’s arguments are (mostly) reasonable, and that the facts make sense.
It’s an interesting ruling that everyone will likely follow. In a blog post on Tuesday, Binance largely reiterated the court’s decision and said it “recognizes the severe limitations on the SEC’s regulatory authority over the crypto industry.”
The judge’s ruling does allow most of the charges to move forward, including counts related to the BNB initial coin offering and Binance’s own ongoing sales of tokens; the BNB treasury; Binance.US’s staking service; violations of the Exchange Act (both the registrant and the controller are charged); and the antifraud provisions of the Securities Act.
I imagine we’ll learn more about the arguments surrounding these charges as the case progresses. In recent times, the judge’s rulings on secondary sales by sellers outside of Binance — a charge she dismissed — and on stablecoins — a charge she also dismissed here — have been well received within the crypto industry.
In her ruling, the judge cited transcripts from multiple hearings and noted that SEC lawyers had stated in court that they did not believe the tokens themselves were securities, but in her view, the SEC appeared to still believe that if the initial sale of a token came with marketing materials or other factors indicating that it was a security, those factors would continue to apply to future sales.
“The asset that is the subject of an intended investment contract is itself a ‘security’ because it moves forward in commerce and is bought and sold by private individuals on any number of exchanges and used in a variety of ways over a period of time. The indefinite term marks a departure from the Howey framework, which leaves courts, industry, and future buyers and sellers in the marketplace with no clear distinction between what tokens are and what are not securities,” the judge wrote.
However, the judge seemed to leave the door open for other arguments around secondary trading in the future, writing in a subsequent paragraph that “more is needed” to support the SEC’s argument about the ongoing sale of tokens. In fact, the judge said in several places that a big problem may be that the SEC does not have enough documents or oral arguments at this time.
On Monday, lawyers for Coinbase filed notices in the SEC’s case against the exchange and in the exchange’s appeal of rulemakings, including Friday’s decision.
In a letter to Judge Katherine Polk Failla, who is overseeing the SEC’s case against Coinbase, the exchange’s lawyers said Friday’s ruling supports its interlocutory motion for appeal — in which the exchange wanted the appeals court to rule on how secondary transactions fit the definition of “secondary trading” because it runs counter to the SEC’s arguments against such appeals.
“The Binance decision adds to the confusion for the industry and its customers. Two district courts, analyzing economically identical transactions on two of the largest cryptocurrency trading platforms in the United States, reached diametrically opposed views on whether those transactions constituted securities transactions,” Coinbase’s notice reads. “As a result of the SEC’s litigation-centric approach to cryptocurrency regulation, market participants now face different rules, not only in different courts in the district, but also in different federal courts across the country.”
In a response Wednesday, SEC lawyers wrote that Friday’s ruling upholds Judge Failla’s ruling on Coinbase’s initial judgment motion and supports the motion to dismiss the interlocutory appeal.
The SEC team wrote that Friday's ruling highlights the power of the Howey test and that the issues surrounding secondary trading are based on facts and circumstances.
“Furthermore, including its conclusion that the SEC did not adequately establish that certain secondary sales of BNB were investment contracts, the decision makes clear that this determination was based on the specific facts presented at the time in the complaint,” SEC lawyers wrote. “…Contrary to Coinbase’s argument, the decision does not make a general statement about whether secondary market cryptocurrency transactions are investment contracts under Howey.”
In other words, the ruling has no impact on the SEC’s allegations against Coinbase or the digital assets the SEC alleged in its complaint, the regulator said.
Other significant U.S. Supreme Court decisions
Of course, there is a broader context to the whole thing. In recent days, the U.S. Supreme Court has issued three major rulings that could affect the cryptocurrency industry’s future relationship with federal regulators. In its ruling in SEC v. Jarkesy, the Supreme Court ruled that the SEC and other federal regulators cannot use internal administrative procedures to hear cases.
CoinDesk’s Cheyenne Ligon reports that the crypto industry hasn’t had many cases resolved through these administrative proceedings so far, so this may not have much of an impact.
On Friday, the Supreme Court overturned 40-year-old Chevron Deference precedent, ruling that the previous Supreme Court had established “unworkable” principles.
On Monday, the Supreme Court ruled that there is no statute of limitations on when private groups can sue a federal agency over its rulemaking, potentially setting back the industry’s hopes of forcing the SEC to write cryptocurrency-specific rules.
