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

Last
week,
a
federal
judge
convened
a
hearing
for
the
U.S.
Securities
and
Exchange
Commission’s
case
against
Binance
after
publishing
her
ruling
on
Binance’s
motion
to
dismiss
the
SEC
lawsuit.

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Last
week,
a
federal
judge
said
she
would
review
her
ruling
in
the
U.S.
Securities
and
Exchange
Commission’s
(SEC)
case
against
Binance
and
affiliated
entities
(namely

Binance.US
and
founder
Changpeng
Zhao)
after
attorneys
for
the
world’s
largest
crypto
exchange
said
they
interpreted
the
ruling
in
a
specific
way
beneficial
to
them.

During
a
hearing
on
July
9,
attorneys
for
Binance
said
they
interpreted

Judge
Amy
Berman
Jackson’s
June
28
ruling
on
Binance’s
motion
to
dismiss
the
SEC’s
case
as
moving
third-party
tokens
–
digital
assets
alleged
to
be
unregistered
securities
by
the
SEC
that
were
issued
by
various
companies
not
named
Binance
–
out
of
the
case.
The
judge
said
that
was
not
her
intention,
which
kicked
off
a
nearly
hour-long
back-and-forth
over
whether
she
had
sufficiently
addressed
both
Binance
and
the
SEC’s
written
arguments
over
these
specific
tokens.

The
SEC’s
June
2023
lawsuit
against
Binance
alleges
the
exchange
offered
and
sold
BNB,
Binance’s
token,
as
an
unregistered
security;
that
it
sold
its
BUSD
stablecoin
as
an
unregistered
security;
that
it
failed
to
register
as
a
broker,
clearing
agency
or
exchange;
that
its
staking
service
violated
federal
securities
laws;
and
that
it
commingled
customer
funds.
As
part
of
its
allegations,
the
SEC
named
10
different
cryptocurrencies
including
solana
(the
rest
are
listed
below)
it
alleged
were
unregistered
securities.

It’s
the
status
of
the
specific
claims
about
the
10
tokens
that
were
discussed
during
last
week’s
hearing
–
and
it’s
difficult
to
say
how
exactly
this
may
resolve
or
what
the
implications
are
for
the
case.
On
the
one
hand,
if
the
judge
decides
that
the
third-party
tokens
should
be
removed
from
the
specific
charges
against
Binance,
that’s
one
less
thing
for
the
exchange
to
have
to
defend
itself
against
and
it
may
limit
or
otherwise
shape
the
scope
of
discovery.
On
the
other
hand,
the
judge
seemed
to
indicate
she
did
not
believe
her
order
moved
the
tokens
out
of
the
case,
which
goes
the
other
way
in
terms
of
how
much
discovery
the
SEC
may
be
entitled
to.

In
her
June
28

ruling,
Judge
Jackson
said
the
SEC
had
brought
plausible
charges
against
Binance,

Binance.US
and
Zhao
tied
to
staking,
the
initial
coin
offering
and
ongoing
direct
sales
of
Binance’s
BNB
token,
the
BNB
vault
(a
staking
and
rewards
program)
and
failing
to
register,
as
well
as
fraud.
Charges
against
Binance’s
Simple
Earn
savings
accounts,
its
BUSD
stablecoin
and
secondary
sales
of
BNB
from
parties
other
than
Binance
were
dismissed.

The
SEC
alleged
that
Binance
in
particular
listed
10
tokens
that
it
viewed
as
securities,
as
examples
of
how
the
exchange
was
violating
federal
securities
laws
by
being
a
broker,
dealer
and
clearinghouse:
SOL,
ADA,
MATIC,
FIL,
ATOM,
SAND,
MANA,
ALGO,
AXS
and
COTI.
In
its

motion
to
dismiss,
Binance
argued
that
the
SEC
couldn’t
plausibly
allege
that
they
were
securities,
saying
they
didn’t
meet
the
tenets
of
the
Howey
Test.

Two
of
Binance’s
arguments
–
that
the
claims
failed
under
the
Major
Questions
Doctrine
and
that
there
needed
to
be
a
formal
contract
–
were
already
“soundly
rejected,”
the
judge
said
during
the
hearing.

SEC
attorney
Matthew
Scarlato
said
Binance’s
arguments
were
addressed
in
the
regulator’s

opposition
memo,
which
pushed
back
on
the
exchange’s
Howey
arguments
and
said
that
the
tokens
were
also
tied
to
a
common
enterprise
where
investors
could
reasonably
expect
a
profit.

Ultimately,
the
judge
said
she’d
take
another
look
at
both
the
motion
to
dismiss,
which
Binance
filed
in
September,
and
the
SEC’s
opposition
memo,
filed
in
November,
to
review
the
arguments
made
about
the
third-party
tokens.

Last
week’s
hearing
also
saw
the
two
parties
(and
judge)
agree
to
a
July
29
deadline
for
jointly
filing
a
proposed
schedule
for
the
next
steps,
which
may
address
other
ongoing
discovery
efforts.

The
judge
also
took
aim
at
bloggers
who
she
said
misinterpreted
her
opinion
as
a
“grand
ruling”
on
stablecoins
or
secondary
crypto
transactions
in
general,
suggesting
it
was
closely
focused
on
the
actual
case
in
front
of
her.

“I
wasn’t
asked
to
decide
and
I
didn’t
decide
whether
a
stablecoin
could
ever”
be
an
investment
contract,
nor
did
the
judge
rule
that
secondary
transactions
of
tokens
by
third
parties
could
never
be
investment
contracts,
she
said
near
the
end
of
the
hearing.

If
you’ve
got
thoughts
or
questions
on
what
I
should
discuss
next
week
or
any
other
feedback
you’d
like
to
share,
feel
free
to
email
me
at

nik@coindesk.com
or
find
me
on
Twitter

@nikhileshde.

You
can
also
join
the
group
conversation
on

Telegram.

See
ya’ll
next
week!