SEC vs. Binance Judge Orders Review on Crypto Classification

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  • The judge overseeing the SEC’s case against Binance has ordered a court review to determine if digital assets should be classified as securities
  • Binance.US lawyers can argue the perpetual security status and contest the SEC’s stance on staking
  • Judge Amy Jackson highlighted the unclear definition, allowing both sides to present their cases before her decision

The judge overseeing the Security and Exchange Commission’s (SEC) case against Binance, Binance.US, and former CEO Changpeng Zhao, has mandated a court review to assess whether digital assets should be classified as securities. The order, dated January 18, grants Binance.US lawyers the opportunity to argue the perpetual security status of digital assets and contest the SEC’s stance on staking as a potential security. Judge Amy Jackson noted that the definition wasn’t clear cut and that representatives from both sides would be given the opportunity to put their cases before she makes a decision, potentially dealing a damaging blow to the SEC.

Binance to Challenge Howey Status

The SEC sued the defendants in June 2023, alleging a “variety of securities law violations” including allowing US citizens to trade unregistered securities on their sites. However, Judge Jackson hasn’t taken the SEC’s arguments at face value, outlining the focus of the upcoming arguments, noting that “The Court intends to hear argument on whether an investment contract must involve a contractual undertaking and whether the SEC ‘misunderstands the meaning of “scheme” in Howey…”.

This refers to The Howey test, which is used by the SEC to determine securities status. The defendants, like others that have taken on the SEC in court (primarily Coinbase), claim that the sale of cryptocurrencies does not constitute the sale of securities; Coinbase’s legal representative this week compared buying tokens as opposed to shares was like buying Beanie Babies compared to shares in Beanie Babies Inc.

Primary and Secondary Sales Considered

In her ruling, Judge Jackson noted that the hearing will cover sales on both the primary (ICO) and secondary (exchange) markets:

The Court assumes from the organization of the memoranda that counsel for Binance Holdings Limited or Zhao intends to address whether the SEC has plausibly alleged the existence of any investment contract with respect to BNB, BUSD, the Third Party Tokens, BNB Vault, and Simple Earn, as well as the extraterritoriality and personal jurisdiction issues, and counsel for the BAM entities intends to address secondary sales, that is, whether a digital asset remains a security in perpetuity, and whether the SEC has plausibly alleged that BAM’s staking service is a security. 

While the court review is pending, it remains uncertain when both sides will present their arguments on the classification of tokens, including BNB and Binance USD (BUSD). The SEC has consistently asserted that tokens, in many U.S. crypto firms’ cases, fall under its regulatory purview as securities, rather than being overseen by the Commodity Futures Trading Commission.

Rulings Could Scupper SEC’s Stance

Judge Jackson’s call for a review comes in the same week as Coinbase and the SEC put their cases to the court, with the potential for different judges to come to different conclusions over the merits of the SEC’s claim that the sale of cryptocurrencies constitutes a sale of securities.

The rulings in these two cases will come after Ripple’s famous victory over the SEC in an identical matter, which will no doubt give the defendants in both cases invaluable precedent. A ruling from both judges in the defendants’ favor would be a massive fillip for the crypto industry in the US, which would finally have unanimous legal arguments for its case.