A federal judge responsible for the Securities and Exchange Commission’s (SEC) case against Binance ruled that most of the case can proceed, but dismissed the charges related to the sale of BUSD and secondary sales of BNB.
Judge Amy Berman Jackson ruled on Friday evening in the District Court of Columbia that the SEC has valid claims against Binance, Binance.US, and Changpeng Zhao, but chose to dismiss most of the charges against these companies. However, she did dismiss the charges related to non-Binance sellers’ secondary sales of BNB, the sale of BUSD, and the allegations related to Binance’s “Simple Earn” product.
One of the questions surrounding the applicability of securities laws to cryptocurrencies is whether secondary sales are considered investment contracts. While there have been rulings from district courts, there hasn’t been one from an appellate court yet.
Judge Jackson’s ruling essentially maintains the status quo surrounding litigation involving cryptocurrencies and securities. She ruled that the major issue in question doesn’t apply, and the SEC’s arguments (for the most part) are reasonable and factually significant.
This is an interesting ruling that everyone will likely take note of. In a blog post on Tuesday, Binance reiterated the court’s ruling and acknowledged the SEC’s limited regulatory jurisdiction over the crypto industry.
The judge’s ruling does allow most of the charges to proceed, including charges related to BNB’s initial token offering and Binance’s continued token sales; BNB vaults; Binance.US’ staking service; violations of securities laws (both registration and control person offenses); and anti-fraud provisions in the Securities Act.
As the case progresses, we will learn more about the arguments surrounding these charges. Recently, the judge’s ruling on secondary sales by sellers other than Binance — which she dismissed — and stablecoins — which she also dismissed here — have been well-received in the crypto industry.
The judge cited transcripts from multiple hearings in her ruling and noted that SEC lawyers stated in court that they don’t believe the tokens themselves are securities. However, in her view, the SEC seems to still think that if the initial sale of tokens had elements of marketing materials or other factors indicating it as a security, those factors will continue to apply to future sales.
“Assets that are offered and sold as part of an investment contract, to be considered a ‘security,’ are those that are sold in commerce with the expectation that they will rise in value, are traded on a market by private parties on an exchange in private sales, and are used in various ways over a finite period of time. The indefinite nature of the term, marking a departure from the Howey framework, which provided no clear distinction between tokens as securities or non-securities in the marketplace, is what makes the underlying asset itself a ‘security,'” the judge wrote.
However, the judge seems to have left the door open for other arguments surrounding secondary trading in the future, as she wrote in subsequent paragraphs that “more is needed” to support the SEC’s argument about the continued sale of tokens. In fact, in some places, the judge indicated that a major issue might be the SEC’s lack of sufficient documents or oral arguments at present.
On Monday, lawyers for Coinbase filed notice of appeal against the SEC’s case against the exchange and its appeal to the rulemaking (including Friday’s decision).
The exchange’s lawyers wrote in a letter to Judge Katherine Polk Failla, who oversees the SEC’s case against Coinbase, that Friday’s ruling supports their motion for an interlocutory appeal — a request to the appellate court to rule on how secondary trading fits into the definition of “investment contract.” Because it contradicts the SEC’s arguments against such an appeal.
“Binance’s decision exacerbates the confusion for the industry and its customers. Two district courts have reached diametrically opposite conclusions regarding the economic same transactions on the two largest cryptocurrency trading platforms in the United States,” Coinbase’s notice read. “The result of the SEC’s litigation-centric approach to cryptocurrency regulation is that market participants now face different rules not only in different districts but in different federal circuits across the country.”
In a response on Wednesday, SEC lawyers wrote that Friday’s ruling supports Judge Failla’s original ruling on Coinbase’s motion and supports the dismissal of the interlocutory appeal.
The SEC team wrote that Friday’s ruling highlights the role of the Howey test and that the question surrounding secondary trading is fact and circumstance-based.
“Additionally, including the conclusion, the decision expressly states that the SEC did not sufficiently prove that certain secondary sales of BNB were investment contracts, and this decision is specific to the particular facts alleged in the complaint,” the SEC lawyers wrote. “…Contrary to Coinbase’s view, the decision does not make a general statement about whether ‘secondary market cryptocurrency trading qualifies as an investment contract under Howey.'”
The regulator said, in other words, the ruling has no impact on the charges the SEC has brought against Coinbase or the digital assets the SEC alleges in its complaint.
Other significant Supreme Court rulings
Of course, there is a broader context to all of this. Over the past few days, the US Supreme Court has issued three significant rulings that could impact the crypto industry’s relationship with federal regulatory agencies going forward. The Supreme Court made a ruling in the SEC v. Jarkesy case, holding that the SEC and other federal agencies cannot use internal administrative procedures to litigate cases.
CoinDesk’s Cheyenne Ligon reported that so far, there haven’t been many cases in the crypto industry resolved through these administrative procedures, so this may not have a significant impact.
On Friday, the Supreme Court overturned the Chevron Deference precedent that had stood for 40 years, ruling that the prior Supreme Court had made a “nonviable” principle.
On Monday, the Supreme Court ruled that there is no time limit on when private groups can sue federal agencies over rulemaking, which could thwart the industry’s hopes of forcing the SEC to make specific rules for cryptocurrencies.
