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Binance Demands SEC Clarity in Ongoing Securities Law Battle

Last Updated January 23, 2024 10:55 AM
Teuta Franjkovic
Last Updated January 23, 2024 10:55 AM

Key Takeaways

  • SEC argued that the Howey Test can be used to regulate specific crypto assets.
  • Judge Jackson questioned Binance’s legal arguments, including their use of the major questions doctrine.
  • SEC’s stance on Binance was scrutinized with the Judge questioning its classification of crypto assets.
On Monday, the U.S. Securities and Exchange Commission (SEC) presented its case in court , affirming its regulatory authority over specific cryptocurrency assets.

This legal stance was in response to Binance, the world’s largest crypto exchange, which requested a federal judge to dismiss the SEC’s lawsuit against it.

Lack of Clear Regulations Draws Scrutiny in Legal Battle with Binance

The hearing concerning Binance’s petition became the second notable legal confrontation in less than a week, potentially shaping the future scope of the SEC’s control over the cryptocurrency industry in the U.S. This follows aforementioned  similar legal dispute between Coinbase and the SEC, where they debated over comparable regulatory issues.

During the hearing, Matthew Gregory, representing Binance, contended that the SEC has failed to establish clear regulations for the cryptocurrency sector. He argued this point to support Binance’s position in the legal dispute.

He stated :

“The SEC to this day has been talking out of both sides of its mouth when it comes to crypto tokens … They’re telling the industry (to) come in and register, while simultaneously with their other hand holding the door closed and preventing any viable path to do that.”

SEC Lawyers Challenge Binance’s Definition of Securities

SEC lawyers responded to Binance’s argument by emphasizing the flexibility of a key legal test, implied to be the Howey Test, used to determine the nature of financial products. They argued that there isn’t a “bright line” clearly separating securities from non-securities, indicating the nuanced application of the law in this domain.

Meanwhile, Binance has requested Judge Amy Berman Jackson, who is overseeing the case, to dismiss the charges brought by the SEC against the company and its related parties.

The SEC had initially filed charges against Binance and its former CEO, Changpeng Zhao, in June 2023. The allegations included operating unregistered national securities exchanges and other services, misrepresenting the trading controls and oversight of Binance.US, and conducting unregistered offers and sales of securities.

This court proceeding for Binance comes on the heels of a similar hearing held on January 17, involving Coinbase, a competing cryptocurrency exchange. Coinbase also presented arguments seeking the dismissal of similar allegations made by the SEC.

Judge Expresses Skepticism Over Binance’s Legal Arguments

During the recent hearing, Judge Jackson appeared notably critical of the arguments presented by Binance, as reported by various sources. Reuters highlighted  that Judge Jackson seemed dismissive of Binance’s reliance on the major questions doctrine in one of their arguments. This doctrine implies that the SEC requires Congress’s approval for certain regulatory measures, a point Binance used to challenge the SEC’s actions.

Fortune’s Leo Schwartz reported  that Judge Jackson was not convinced by Binance’s claim that securities offerings must always involve contracts. She pointedly remarked that Binance was being “a little too cute” with this assertion and clarified that the Howey Test, used to determine what constitutes a security, encompasses broader criteria. Further, Judge Jackson criticized an analogy made by Binance comparing baseball cards , typically not regarded as securities, to the products under scrutiny in this case.

Crypto lawyer Jeremy Hogan noted  that Judge Jackson also questioned the validity of Binance’s fair notice defense. This defense suggests that the SEC should have provided Binance with a warning regarding its alleged securities violations prior to filing formal charges.

Scrutinizing SEC’s Stance in Binance Case

Judge Amy Berman Jackson also directed critical inquiries towards the SEC’s position in the Binance case, as reported  by Blockworks journalist Casey Wagner. In the SEC’s initial charges, the regulator classified Binance’s own cryptocurrencies, such as BNB and the now largely inactive Binance USD (BUSD) stablecoin, as securities.

Furthermore, the SEC contended that several other tokens which Binance handles but does not issue, including but not limited to Cardano (ADA), Polygon (MATIC), and Solana (SOL), also fall under the category of securities. Judge Jackson scrutinized these claims, expressing skepticism over the SEC’s arguments.

She stated :

“If it’s so obvious that these are securities, where has the [SEC] been? And why isn’t it relevant that the SEC took the opposite position or no condition for so many years?”

SEC Clarifies ‘Fair Notice’ Defense in Binance Case

In response to the discussion, an SEC lawyer clarified that under the Howey Test, regulators are not obligated to notify parties about potential violations. This was in reference to Binance’s fair notice defense.

Judge Jackson raised additional concerns regarding the several third-party tokens that Binance manages but does not issue. She expressed worries about the potential complexity in discovery and the numerous trials that might arise from each of the named assets, especially since the issuers of these tokens are not currently parties in the lawsuit.

The SEC’s allegations are partly based on the premise  that many ongoing activities involving the relevant crypto assets are associated with a “reasonable expectation of profit,” fulfilling one criterion of the Howey Test. However, the specifics of how the SEC plans to present and argue this aspect of its case in future legal proceedings are yet to be seen.

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