July 14, 2024
1 Solar System Way, Planet Earth, USA

SEC loses bid to classify BNB secondary sales as securities

Key takeaways

  • The court concluded that the SEC's reliance on the argument that BNB tokens represent investment contracts throughout their lifecycle is insufficient.
  • The dismissal may provide a legal basis for other exchanges to contest similar regulatory challenges.

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The US Securities and Exchange Commission (SEC) lost its attempt to classify sales of BNB, Binance's native token, on secondary markets, and the Binance USD stablecoin (BUSD) as securities, according to a judicial presentation signed by Judge Amy Berman Jackson on June 28.

The court referenced the 2023 ruling by Judge Analisa Torres in the SEC vs. Ripple Labs to dismiss secondary BNB sales claim. She noted that determining whether a secondary market sale is a sale of an investment contract depends on the totality of the circumstances and the economic reality of each specific transaction.

According to the filing, the SEC's argument was based on the idea that if BNB was initially sold as an investment contract, any subsequent token sale would also be considered a sale of a security.

However, the court said that this claim is invalid as it does not take into account the specific details and context of each secondary transaction. In other words, the fact that BNB tokens were initially sold as investment contracts does not mean that they remain securities throughout their life cycle.

The court also highlighted inconsistencies in the SEC's position and noted that more facts are needed to plausibly allege an expectation of secondary sales profits under the Howey test.

Scott Johnsson, general partner at Van Buren Capital, called the ruling a “huge loss” for the SEC.

James “MetaLawMan” Murphy, a cryptocurrency-focused attorney, also welcomed the decision, calling it “a victory for the greater cryptocurrency industry.”

The court’s dismissal of the SEC’s argument regarding BNB secondary sales could influence other cases involving cryptocurrency exchanges like Kraken and Coinbase, as they face similar SEC charges for trading in crypto assets deemed unregistered securities.

Most charges moving forward

While the court dismissed the SEC's secondary market sales claim, it mostly sided with the SEC in its lawsuit against Binance.

As noted, the SEC may further investigate Binance's staking program, the sale of BNB tokens after its initial coin offering (ICO), and potential anti-fraud violations.

The court will also consider the SEC's claims that former Binance CEO Changpeng Zhao significantly influenced Binance and that Binance should have registered as an exchange.

CZ is currently serving a separate sentence for violating money laundering laws.

The SEC's lawsuit against Binance began in June last year when the securities regulator defendant Binance and its founder Changpeng Zhao alleged that Binance was operating illegally in the US by offering to sell unregistered securities.

About three months later, Binance filed a motion to dismiss the SEC's lawsuit, arguing that the SEC had exceeded its legal authority.

Following the latest court order, the next court hearing is scheduled for July 9.

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