The Securities and Exchange Commission is back in court with crypto for the second time in a week, this time against Binance, the world’s largest crypto exchange.
Binance seeks to have Judge Amy Berman Jackson of the District Court for the District of Columbia toss out a lawsuit levied by the SEC in June, accusing Binance of artificially inflating trading volumes, commingling and diverting customer assets, and secretly allowing high-value U.S. customers to trade on it even after claiming restrictions against such activity.
Additionally, the SEC alleged that Changpeng Zhao controlled Binance’s U.S. affiliate, Binance.US, despite asserting its independence.
Much of the SEC's case against Binance revolves around crypto being – or not being – securities that fall under the purview of the SEC.
The commission alleges that, as determined by the Howey test – a test born out of a Supreme Court case that determined what was considered a type of a security called an investment contract – crypto is an investment contract because it meets four criteria: it involves the investment of money in a common enterprise with an expectation of profits resultant of the efforts of others.
But Binance disagrees with the SEC’s perspective, asserting that an actual contract must be involved for an asset to be a security. Jackson pushed back, according to The Block, arguing that case law indicates that the Howey test statute is designed to be broad.
Questioning, too, the SEC’s lawyers, she said, as reported in Reuters, “It seems like you are trying to say that all digital assets, at the end of the day, have the earmark of securities. If you are not, where is the boundary of what you are saying?”
Her comments echoed Judge Katherine Polk Failla of the District Court for the Southern District of New York who, during the SEC vs. Coinbase hearing last week, posited to SEC assistant chief litigation counsel Patrick Costello her concern that “what [the SEC is] asking for is to broaden the definition of what constitutes a security.”
Like Failla, Jackson opted not to make a decision from the bench, and said she would take the issue under advisement.
Like Coinbase, attorneys for Binance also sought to invoke the major questions doctrine, which states that Congress does not delegate government agencies issues of major political or economic significance. Jackson, however, wasn’t sure it applied.
“I have to say that while this may be a trillion dollar industry, I'm not inclined to think it qualifies under the very narrow circumstances outlined in these cases,” she said, according to The Block.
The SEC lawsuit is the remaining ax hanging overhead for Binance, which settled with the Justice Department, the Treasury Department, the Commodity Futures Trading Commission and the Office of Foreign Assets Control for $4.3 billion in November to resolve violations related to the Bank Secrecy Act, the International Emergency Economic Powers Act and the exchange’s failure to register as a money transmitting business.
Founder and then-CEO Zhao pleaded guilty to anti-money-laundering law violations and evacuated his post, forking over $50 million himself. His sentencing hearing is scheduled for Feb. 23.