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In a groundbreaking legal maneuver, cryptocurrency exchange giant Binance, its U.S. affiliate Binance.US, and their CEO Changpeng Zhao, commonly known as “CZ,” have delivered a robust response to the U.S. Securities and Exchange Commission (SEC) in their ongoing legal battle.
The response, filed on Tuesday, challenges the SEC’s assertion that the crypto exchanges and their founder violated the “Howey Test,” a crucial legal benchmark used to determine whether a transaction qualifies as an investment contract under U.S. securities laws. This development represents the latest salvo in the exchange platforms’ efforts to have the lawsuit dismissed. It follows allegations of facilitating the purchase and trade of unregistered securities by the public.
Meanwhile, the veil of secrecy surrounding the exchange’s compliance commitments with the United States Department of Justice (DOJ) was lifted on December 8. Former SEC official John Reed Stark characterized the extensive list of obligations as a “consulting firm’s wish list” and voiced concerns that these commitments could potentially lead to the platform’s closure. These unsealed commitments provide insight into the substantial government oversight that the crypto platform is set to undergo, raising questions about the future of one of the world’s largest cryptocurrency exchanges.
Binance and Changpeng Zhao Challenge SEC’s Howey Test in Lawsuit Response
In a significant legal development, cryptocurrency exchange titan Binance, its U.S. counterpart Binance.US, and their CEO Changpeng Zhao, known as “CZ,” have submitted a response to the SEC’s lawsuit against them. In this reply, filed on Tuesday, the parties contest the SEC’s claim that the requirements of the “Howey Test” were met.
This response marks the latest move in an ongoing effort to have the lawsuit, originally initiated by the federal regulator in June, dismissed. The SEC had accused Binance and Binance.US of enabling the general public to purchase and trade unregistered securities by listing certain cryptocurrencies and providing a staking service.
The crypto exchange, which recently reached settlements with various U.S. regulatory agencies, including the Department of Justice (DOJ), the Commodity Futures Trading Commission (CFTC), the Office of Foreign Asset Control (OFAC), and the Financial Crimes Enforcement Network (FinCEN), sought to dismiss the SEC lawsuit back in September. Their argument centered on the belief that the regulator was overstepping its jurisdiction, echoing a similar argument made to dismiss a CFTC lawsuit in July.
In their latest legal filings, both Binance and Binance.US challenged the SEC’s assertion that there were contractual obligations between the exchanges and their U.S. customers following the purchase of specific cryptocurrencies. This argument suggests that the essential criteria for an “investment contract” under the Howey Test were not met.
The Howey Test, stemming from the Supreme Court case SEC v. W.J. Howey Co. (1946), is a legal standard employed to determine whether a particular transaction qualifies as an investment contract, thus falling under the purview of securities laws.
In response to the SEC’s use of the exchange’s settlement with the DOJ and consent order with FinCEN as evidence in the ongoing case, Binance raised objections. The SEC argued that these settlements demonstrated Binance’s full awareness of its U.S. operations, its service to U.S. customers, and its utilization of U.S. infrastructure for transactions. However, Binance contended that the settlements were irrelevant to the securities laws being invoked in the lawsuit.
Furthermore, the exchange platform asserted that the securities laws in question should not be applied in the same manner as the Bank Secrecy Act or the International Emergency Economic Powers Act, the legal bases for the charges it previously settled with U.S. authorities. In their filing, Binance and Zhao claimed that the admissions made under the Bank Secrecy Act did not extend the SEC’s claims into the realm of securities laws.
Binance’s Compliance Commitments with U.S. Government Unsealed, Shaping Its Future
In a momentous development within the cryptocurrency sphere, the compliance commitments of the exchange, one of the world’s largest cryptocurrency exchanges, with the United States Department of Justice (DOJ) were revealed on December 8, shedding light on the extent of government oversight into the exchange’s operations and business activities.
Renowned former SEC official John Reed Stark took to social media to analyze the newly disclosed compliance commitments. He described the exhaustive list of Binance’s obligations as resembling a “consulting firm’s wish list” and raised the possibility that these commitments could lead to the platform’s closure.
The comprehensive list of Binance’s new compliance obligations spans an 11-page document and includes a commitment to cooperate with authorities, granting them access to documents, records, and resources upon request. This access encompasses information related to the exchange’s current and former employees, agents, intermediaries, consultants, representatives, distributors, licenses, contractors, suppliers, and joint venture partners. Stark underscored the broad scope of this cooperation.
Government oversight of Binance’s activities will be multifaceted, with several divisions of the DOJ’s criminal division closely monitoring the exchange. These divisions include those responsible for money laundering and asset recovery, national security, counterintelligence and export control, as well as the office for the Western District of Washington’s United States Attorney.
Binance’s settlement with the U.S. government, disclosed earlier, also includes five years of oversight by the Financial Crimes Enforcement Network (FinCEN). The combination of these extensive oversight mechanisms is expected to come at a significant cost to the exchange, potentially amounting to millions of dollars. Stark aptly described this level of scrutiny as a “24/7, 365-days-a-year financial colonoscopy,” which will not only impact the exchange but also its customers.
Binance and its former CEO, Changpeng “CZ” Zhao, recently admitted to violating U.S. money laundering and terror financing laws, leading to an agreement to pay $4.3 billion in fines on November 21.
Furthermore, these newly unsealed court records have found their way into a recent filing by the U.S. SEC. The SEC aims to strengthen its case against Binance and Zhao by incorporating the DOJ’s enforcement actions and settlements into its arguments.
On June 5, the SEC brought forth 13 charges against Binance, accusing the exchange of unregistered offers and sales of tokens like BNB (Binance Coin) and BUSD (Binance USD), as well as the Simple Earn and BNB Vault products, and its staking program. The SEC also alleges that Binance failed to register its Binance.com platform as an exchange or broker-dealer clearing agency.
In its latest filing, the SEC requests that the court takes “judicial notice” of the facts presented in Binance’s settlement. Stark explains that this request essentially seeks the judge’s acknowledgment of these facts as true without the need for formal evidence presentation.
The SEC’s reliance on the settlement is part of its strategy to challenge Binance’s motion to dismiss the case, weakening the exchange’s arguments regarding its presence and operations in the United States in recent years.
According to Binance’s settlement with the DOJ, the exchange had more than three million U.S. customers as of March 2018, and approximately 30% of its web traffic originated from the United States by June 2019. These figures underscore the
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