Binance SEC Probe: Legal Battle Raises Questions on BNB and BUSD Classification
Binance clarified the classification of its BNB crypto tokens and their adherence to SEC regulations in court, seeking a lawsuit dismissal.
Cryptocurrency exchange Binance appeared before the United States Securities and Exchange Commission (SEC) in the US District Court for the District of Columbia on Monday, seeking to have a lawsuit filed by the regulator dismissed.
During the proceedings, Judge Amy Berman Jackson posed questions to both parties regarding the classification of specific cryptocurrencies as securities and their adherence to SEC regulations.
The Judge inquired from both sides about the compliance of cryptocurrency tokens Binance coin (BNB), Binance US dollar stablecoin (BUSD), and other assets traded on Binance with the criteria outlined in the Howey test. The Howey test is a set of parameters employed by the SEC to ascertain whether an asset qualifies as a security or not.
The judge expressed concern during Monday’s hearing regarding Binance’s legal representation of the Howey Test.
“Howey says an investment contract is, quote, a contract, transaction, or a scheme. One of three things. It didn’t say a contractual transaction or scheme,” said Amy Berman Jackson, judge at US District Court for the District of Columbia.
Binance’s lawyers asserted that an actual contract must be part of the equation for an asset to be considered a security. However, she later challenged this interpretation, citing case law that emphasizes the broad nature of the statute.
The judge appeared doubtful regarding the notion that the BUSD stablecoin was presented as an investment contract. On the other hand, she considered the fact that Binance originally presented the BNB token as an investment contract. However, concerning the concept that the token, even if initially offered as an investment contract, maintains its status as a security indefinitely when traded on the secondary market, there was hesitancy on Amy Berman Jackson’s part.
The SEC lawyer contended that the token “embodies” the investment contract, a stance that appears inconsistent with earlier statements characterizing the token as nothing more than lines of code.
Later in the hearing, Amy Berman Jackson questioned SEC lawyers about the criticism the agency has faced for perceived ambiguity in communicating how its rules apply to the cryptocurrency sector. The SEC’s representative disagreed with the notion that the agency has issued conflicting statements, pointing to guidance released over the years.
The SEC lawyer emphasized, “Howey is clear, and you don’t need a regulator to reach out to you specifically to remind you that you might be violating the securities laws.”
From the SEC’s perspective, Binance’s persistent promotion of its business and the BNB and BUSD tokens created reasonable expectations of profit for token buyers. In contrast, Binance’s lawyers argued that the act of promotion itself should not be considered a determining factor, as any business engages in self-promotion.
Secondary Token Sales and BUSD Classification
A recurring topic during the hearing was the consideration of whether sales of tokens on the secondary market should be treated on par with the primary token sales conducted by the issuing projects. Binance’s defense team contended that secondary sales occurring on the Binance platform do not aggregate funds that are subsequently invested in a common enterprise, which is one of the criteria outlined in the Howey test.
The SEC asserted that if a token exhibits characteristics of a security, those attributes persist in any sale. Additionally, the SEC counsel argued that the establishment of a secondary market for blockchain tokens contributes to increasing their value, a factor that buyers are aware of and anticipate.
They further contended that BUSD stablecoin should be classified as a security because it was marketed as part of a package, bundled with services enabling users to earn yield on their assets on the Binance platform, including BUSD.
Binance Cites Major Questions Doctrine
During the hearing, Binance cited the major questions doctrine saying that if an agency aims to make decisions on matters of significant national importance, it must be supported by clear congressional authorization. The company asserted that the major questions doctrine is applicable to its case.
According to Binance’s attorney, if the court aligns with the SEC’s perspective, it would potentially allow the SEC to extend its regulatory authority to any appreciating asset. However, the judge expressed skepticism in response to that.
“I have to say that while this may be a trillion-dollar industry, I’m not inclined to think it qualifies under the very narrow circumstances outlined in these cases,” said Amy Berman Jackson, judge at US District Court for the District of Columbia.
Additionally, there was considerable discussion about delineating the boundaries between SEC authority and US Commodity Futures Trading Commission (CFTC) authority, with no conclusive resolution reached.
Binance and Coinbase Navigate SEC Allegations
The SEC sued Binance Holdings and its former chief executive officer Changpeng Zhao in June. The allegations include accusations of deceptive practices towards customers, failure to enforce restrictions on United States investors accessing Binance.com, misallocation of capital to investment funds owned by Changpeng Zhao and functioning as an unregistered exchange. Additionally, the SEC identified 12 tokens on the exchange, including BNB and BUSD, as securities.
Monday’s hearing marked the second encounter between the SEC and cryptocurrency exchanges this month.
Recently, the company operating the cryptocurrency exchange platform Coinbase also appeared in court proceedings with the SEC with the similar case. However, Coinbase is accused of operating as an unregistered securities exchange, and the allegations do not include charges related to fraud as in the case of Binance.
Last year, the SEC initiated legal proceedings against Coinbase, alleging that the platform operated as an unregistered exchange, broker, and clearing agency. The SEC’s claim stated that Coinbase facilitated trading of at least 13 tokens that, according to the SEC, should have been registered as securities.
During court proceedings on Wednesday, Manhattan Federal Judge Katherine Polk Failla raised inquiries with Coinbase regarding the classification of tokens listed on its platform. She sought clarification on whether these tokens could be considered securities. Following the hearing, the judge refrained from making an immediate decision.
Similar to the Binance situation, the SEC referred to the December summary judgment in its case against Terraform Labs during the court proceedings. In that case, a judge sided with the SEC, asserting that the UST (Terra) stablecoin was sold as an investment contract. The key use case cited was its potential for yield earning through the Anchor protocol. This argument brought a partial win to The SEC in the Terraform case.
Additionally, while facing scrutiny from the SEC’s enforcement team, both cryptocurrency exchanges have invoked the major questions doctrine and advocated for Congressional intervention.
The legal proceedings between Binance and the SEC remain ongoing, with the company continuous attempts to have the lawsuit dismissed.
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