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A Second Look at Third-Party Token Allegations in the SEC’s Case Against Binance

Jul 18, 2024

As a seasoned tech journalist with over a decade of experience under my belt, I’ve covered countless stories and legal battles within the crypto space. Last week’s hearing between Binance and the SEC regarding the status of third-party tokens was particularly intriguing to me, given my background in following these types of cases.

I served as an analyst in reviewing recent developments in the SEC’s legal action against Binance. Last week, a federal judge presided over a hearing following her decision on Binance’s request to dismiss the lawsuit.

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Third-party questions

The narrative

A federal judge announced last week that she would reconsider her decision in the SEC’s case against Binance, Binance.US, and their founder Changpeng Zhao. The lawyers for Binance argued that the ruling could be interpreted in a favorable way for their clients, prompting the judge to review her initial decision.

At a court proceeding on July 9, lawyers representing Binance argued that Judge Amy Berman Jackson’s June 28 decision on Binance’s request to dismiss the SEC’s charges didn’t mean removing third-party tokens (digital assets suspected of being unregistered securities by the SEC, which were issued by different entities apart from Binance) from the case. The judge clarified that she hadn’t intended this outcome, leading to a lengthy debate about whether she had adequately addressed both parties’ written submissions on these specific tokens.

Why it matters

In June 2023, the Securities and Exchange Commission (SEC) filed a lawsuit against Binance for various violations of federal securities laws. The charges include: offering and selling Binance’s token BNB without registration as a security; selling their stablecoin BUSD as an unregistered security; failing to register as a broker, clearing agency, or exchange; operating an unlawful staking service; and commingling customer funds. Among the ten cryptocurrencies named in the lawsuit as allegedly unregistered securities are Solana (alongside others, although the full list is not provided).

As a researcher examining last week’s hearing regarding Binance and the 10 tokens under discussion, it’s unclear what the outcome will be for their status in the case. If the judge rules that third-party tokens should no longer be part of the charges against Binance, this could potentially simplify the defense for the exchange and possibly narrow the scope of discovery. However, based on her previous indications during the hearing, it seems she may not believe her order removed these tokens from the case entirely, which could mean more extensive discovery for the SEC.

Breaking it down

In her June 28 decision, Judge Jackson stated that the Securities and Exchange Commission (SEC) had presented valid accusations against Binance, Binance.US, and Zhao. These allegations related to Binance’s staking program, initial coin offerings (ICOs), ongoing sales of BNB tokens, the BNB vault, and failure to register, as well as fraud. However, Judge Jackson dismissed the SEC’s charges concerning Binance’s Simple Earn savings accounts, Binance’s BUSD stablecoin, and secondary sales of BNB from entities other than Binance.
The Securities and Exchange Commission (SEC) accused Binance of listing 10 specific tokens – SOL, ADA, MATIC, FIL, ATOM, SAND, MANA, ALGO, AXS, and COTI – which it believed were securities. Binance challenged this assertion in its motion to dismiss, arguing that these tokens did not satisfy the requirements of the Howey Test and therefore should not be classified as securities.

During the hearing, the judge dismissed Binance’s two contentions – that the allegations did not meet the Major Questions Doctrine criteria and that a formal contract was required.

SEC attorney Matthew Scarlato contested Binance’s defense in the opposition memo by refuting their Howey test arguments and emphasizing that the tokens were linked to a collective enterprise, allowing investors to anticipate profits.

In the end, the judge indicated that she would re-examine both Binance’s September request to discard the case and the SEC’s November counterargument memo, in order to carefully consider the points raised concerning the third-party tokens.

During last week’s court session, all parties involved, including the judge, reached a consensus regarding a July 29 timeline. This means that they will collectively submit a proposed plan by this date for the subsequent stages of the proceedings, possibly addressing any remaining discovery processes.

The judge cautioned against misunderstanding her decision as a sweeping statement on stablecoins or secondary crypto transactions in the case at hand. Instead, she emphasized that her opinion was specifically targeted towards the matter before her.

During the court proceeding, the judge made it clear that neither I nor anyone else was tasked with determining if a stablecoin could ever constitute an investment contract. Furthermore, the judge did not pass judgment on whether secondary market transactions of tokens by external parties would always qualify as investment contracts.

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This week

A Second Look at Third-Party Token Allegations in the SEC's Case Against Binance

This week

  • Not a lot going on. This week’s the Republican National Convention, which had a few crypto sessions but nothing major.

Elsewhere:

  • (CNN) A software provider for car dealerships called CDK Global was hit by ransomware last month, preventing a large swath of these dealerships from making sales or handling other normal operations. CNN reports that CDK “appears to have paid a $25 million ransom” to the attackers, and shortly after came back online.
  • (Reuters) Boeing CEO Dave Calhoun called National Transportation Safety Board Chair Jennifer Homendy to apologize for Boeing’s releasing speculative and non-public information on Alaska Airlines flight 1282, the Boeing 737 MAX 9 that saw a door blow out mid-flight.
  • (BusinessDen) You remember that Denver pastor accused of stealing $1.3 million from investors in a crypto project he’s spearheading, that he said God told him to take? That suit’s still ongoing. Eli Regalado told BusinessDen, “please quote me on this: The Division of Securities is not fighting against me, they’re fighting against God, and they will lose.”
A Second Look at Third-Party Token Allegations in the SEC's Case Against Binance

If you have any suggestions or queries regarding the topics I should cover in the upcoming week or any feedback in general, please don’t hesitate to reach out to me via email at nik@coindesk.com or connect with me on Twitter @nikhileshde.

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See ya’ll next week!

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2024-07-19 18:27