“We are operating as a fking unlicensed securities exchange in the USA bro.”
- Binance’s CCO admitted to another Binance compliance officer in December 2018.[1]
Cryptocurrencies as assets
The Securities Exchange Commission (SEC) has classified a number of crypto currencies provided by Binance Holdings Limited as securities and therefore “have unlawfully solicited U.S. investors to buy, sell, and trade crypto asset securities through unregistered trading platforms available online at Binance.com”[2]
The Howey Test has significant implications for the cryptocurrency industry, as it helps regulators determine whether a particular token or investment opportunity falls within the scope of securities laws. If a token satisfies the criteria set forth by the Howey Test, it will be classified as a security and subject to the applicable securities regulations, including registration requirements and investor protection provisions.
61 cryptocurrencies pass Howey’s test
The SEC has considered that 61 cryptocurrencies available for investment provided by Binance pass the howey test:
- investment of Money: Individuals invest money or assets with profit expectations;
- common Enterprise: Multiple investors pool resources where success relies on others’ efforts, such as centralized entities in the crypto context;
- expectation of Profit: Investors anticipate profits primarily from others’ efforts rather than their own actions;
- efforts of Others: Profits are generated primarily from external parties’ efforts.
Binance stated through a memorandum that: “Digital asset laws remain largely undeveloped in much of the world, and regulation by enforcement is not the best path forward. An effective regulatory framework demands collaborative, transparent, and thoughtful policy engagement – a path the SEC has abandoned.”[3] Binance “will vigorously defend against any allegations to the contrary” in light of the allegations presented by the SEC.
The lawsuit presented by the SEC states the reasoning behind categorizing several cryptocurrencies as securities. Most importantly, BNB Binance native coin: “From the time of the ICO to the present, BNB was offered and sold as an investment contract and, therefore, as a security.” In the eyes of the SEC the BNB token complies with the howey test and is therefore an investment contract worthy of being declared a security. As a result the lawsuit states a clear description of why all similar tokens provided by Binance.com and Binance.us are and should be compliant with the securities laws in the US.
Title VII No. 289 of SEC’s lawsuit states that: “Binance offered and sold BNB as an exchange token, marketing it to investors as an investment in the success of the Binance.com Platform itself and touting both the potential returns that investors could achieve from purchasing the token by transacting on the platform and that investors could expect increased demand and price for the token as the platform grew.”[4]
Binance, which the SEC alleges admitted to operating as an unlicensed securities exchange in the US, has taken a strong stance, expressing its belief that collaborative and transparent policy engagement is crucial for effective regulation. As the legal battle unfolds, the outcome of this lawsuit will shape the future regulatory landscape for digital assets, with implications extending beyond Binance to the broader crypto ecosystem.
[1] https://www.sec.gov/files/litigation/complaints/2023/comp-pr2023-101.pdf
[2] https://www.sec.gov/files/litigation/complaints/2023/comp-pr2023-101.pdf
[3] https://www.binance.com/en/blog/ecosystem/sec-complaint-aims-to-unilaterally-define-crypto-market-structure-8707489117122437402 2023-06-05
[4] https://www.sec.gov/files/litigation/complaints/2023/comp-pr2023-101.pdf
