Binance Takes On SEC, Challenging the 'Howey Test' in Lawsuit Response

Binance, Binance.US, and Changpeng Zhao challenge the SEC lawsuit by arguing that the regulator failed to meet the requirements of the "Howey Test".

In a bold legal move, Binance, its U.S. counterpart Binance.US, and their founder Changpeng Zhao, known as "CZ," have responded to the U.S. Securities and Exchange Commission (SEC) in their ongoing lawsuit. The response, filed on Tuesday, contests the SEC's assertion that the crypto exchanges and their founder violated the "Howey Test," a critical legal standard used to determine whether a transaction constitutes an investment contract under U.S. securities laws. This latest development marks another attempt by the exchange platforms to have the lawsuit dismissed, following allegations that they allowed the public to buy and trade unregistered securities.

In related news, the veil of secrecy surrounding Binance's compliance commitments with the United States Department of Justice (DOJ) was lifted on Dec. 8, unveiling a comprehensive regulatory framework. Former SEC official John Reed Stark characterized the extensive list of obligations as a "consulting firm's wish list" and raised concerns that these commitments might have the potential to shutter the platform. These unsealed commitments provide a glimpse into the significant government oversight that Binance is set to endure, 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 new legal development, cryptocurrency exchange giant Binance, its U.S. affiliate Binance.US, and their founder Changpeng Zhao, commonly known as "CZ," have filed a response to the SEC lawsuit against them. In the reply submitted on Tuesday, the parties argued that the SEC failed to meet the requirements of the "Howey Test" in its case against the exchange platforms and their founder.

This response marks the latest effort to have the lawsuit, which was originally filed 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.

Binance, which recently settled different charges 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), filed a motion to dismiss the SEC lawsuit back in September. Their argument centered on the belief that the regulator was exceeding its jurisdiction, a similar argument they had previously made to dismiss a CFTC lawsuit in July.

In the latest legal filings, Binance and Binance.US both challenged the SEC's assertion that there were any contractual obligations between the exchanges and their U.S. customers following the purchase of certain cryptocurrencies. This argument suggests that the essential criteria for an "investment contract" under the Howey Test were not met.

The Howey Test, derived from the Supreme Court case SEC v. W.J. Howey Co. (1946), is a legal standard used to determine whether a particular transaction constitutes an investment contract, and thus falls under the jurisdiction of securities laws.

In response to the SEC's inclusion of Binance's settlement with the DOJ and consent order with FinCEN as evidence in the ongoing case, Binance raised objections. The SEC contended that these settlements demonstrated that Binance was fully aware of its U.S. operations, its service to U.S. customers, and its utilization of U.S. infrastructure for transactions. However, Binance argued that the settlements were not relevant to the securities laws being invoked in the lawsuit.

Furthermore, Binance asserted that the securities laws at hand should not be applied in the same manner as the Bank Secrecy Act or the International Emergency Economic Powers Act, which were 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 significant development within the cryptocurrency landscape, the compliance commitments of Binance, one of the world's largest cryptocurrency exchanges, with the United States Department of Justice (DOJ), were unsealed on Dec. 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 X (formerly Twitter) to provide an analysis of the newly revealed compliance commitments. He characterized the exhaustive list of Binance's obligations as akin to a "consulting firm's wish list," suggesting that these commitments could potentially lead to the platform's shutdown.

The detailed 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 pertaining to the exchange's current and former employees, agents, intermediaries, consultants, representatives, distributors, licenses, contractors, suppliers, and joint venture partners. Stark emphasized the broad scope of this cooperation.

Government oversight of Binance's activities will be multi-faceted, with several sections of the DOJ's criminal division closely monitoring the exchange. These include divisions responsible for money laundering and asset recovery, national security, counterintelligence and export control, and 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 affect 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 Nov. 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 Jun. 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 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 significance of the case and the potential implications it holds for Binance and the broader cryptocurrency industry, as regulatory authorities intensify their oversight of the digital asset ecosystem.