WASHINGTON (CN) — Cryptocurrency trading platform Binance on Monday asked a federal judge to dismiss a lawsuit by the U.S. Securities and Exchange Commission, arguing the agency lacks jurisdiction to pursue the case.
In June 2023, the SEC filed the lawsuit against Binance, its founder Changpeng Zhao and Binance’s U.S. arm, citing the defendants’ “blatant disregard of the federal securities laws” that allowed them to enrich themselves by the billions while putting their customers’ assets at risk.
According to the complaint, the crypto giant artificially inflated its trading volume, diverted customer funds, failed to restrict U.S. customers from its platform and misled investors about market surveillance controls. Additionally, the company facilitated the trading of cryptocurrencies the SEC considers unregistered securities.
Zhao specifically avoided registering the company in the United States as a way to avoid U.S. regulatory oversight and to insulate himself from criminal liability. He pleaded guilty to money laundering violations, agreed to pay $50 million and stepped down as CEO of the company in November 2023.
Binance pleaded guilty and agreed to pay $4.3 billion in fines as part of a settlement agreement with the Justice Department, Treasury Department and Commodity Futures Trading Commission in a separate case.
The site allows users to trade up to 150 cryptocurrencies, including bitcoin, ethereum, dogecoin and its cryptocurrency, Binance Coin (BNB).
But the charges brought by the SEC hinge on the question of whether users' activities on the site count as “investment contracts” and are therefore securities regulated by the SEC, according to the Binance's motion to dismiss filed in September 2023.
An investment contract, as defined by the Supreme Court in SEC v. W.J. Howey Co., is a method where people invest money in a “common enterprise and reasonably expect profits or returns derived from the entrepreneurial or managerial efforts of others.”
The resulting “Howey test” has been used by courts to determine that investment contracts can apply to a range of themes to raise money, such as orange groves, animal breeding programs, cattle embryos, mobile phones, internet-only enterprises and crypto assets.
Jason Mendro, a Gibson Dunn attorney representing Binance, told U.S. District Judge Amy Herman Jackson on Monday the “secondary sale” of third-party cryptocurrencies to users on the site does not clear the Howey standard, pointing to a lack of a contractual arrangement promising a return.
He said the sales were comparable to those of real estate, gems, wine, art and baseball cards, assets that people invest in that do not count as securities.
But SEC regulators pointed to the company’s promotions of BNB, touting it as an investment in Binance to help create a successful crypto trading platform and improve the Binance ecosystem, marking it as a security under Howey.
Jackson, a Barack Obama appointee, spent much of the nearly five-hour hearing grilling attorneys from either side about the definition of securities and commodities to find the jurisdictional line between the SEC and the Commodity Futures Trading Commission.
The case comes after a meteoric and controversial rise in the use of cryptocurrency around the globe since the launch of bitcoin in 2009 and highlights the murky regulatory waters surrounding the industry.
Congress has been slow to act on the issue but received some motivation after the sudden collapse of crypto companies like FTX — whose founder, Sam Bankman-Fried, was recently convicted for defrauding customers and investors — Celsius Network and Voyager Digital.
But legislation has stalled in Congress, including a bill that would give the Commodity Futures Trading Commission authority over cryptocurrency rather than the SEC, with a recent crypto market structure bill from House Financial Services Committee Chair Patrick McHenry being cut from the National Defense Authorization Act.
According to Mendro, the lack of regulatory clarity means the SEC’s enforcement efforts will have a major impact on a trillion-dollar industry “potentially impacting as many as one in five Americans.”
He invoked the majors question doctrine — a carveout of the Chevron doctrine created by the Supreme Court to weigh in on politically volatile issues rather than defer to government agencies — arguing that the SEC does not have explicit congressional authority to regulate crypto in this way.
“Essentially the SEC would become the Investment Exchange Commission, if there’s no difference between securities and investment,” Mendro said.
But Jackson seemed to disagree that the major questions doctrine applied in the case, finding it applies to legal issues that could impact the entire economy, not just a single industry.
She indicated she would issue a ruling on whether to dismiss the case in the coming weeks.
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