What is the boundary between securities?

On the 22nd, a hearing was held in the U.S. District Court for the District of Columbia in the U.S. Securities and Exchange Commission’s (SEC) lawsuit against Binance (global version), a major crypto asset (virtual currency) exchange. Justice Amy Berman Jackson focused on the debate over the securities nature of virtual currencies, asking both sides specific questions.

In June last year, the SEC sued Binance, including its U.S. division, and then-CEO Changpeng Zhao (CZ) on 13 charges, including offering unregistered securities, but Binance asked the court to dismiss the lawsuit. I’m looking for.

connection:US SEC sues Binance and CZ, claiming many virtual currency stocks are securities

Last November, Binance pleaded guilty to violating the Anti-Money Laundering and Sanctions Act and settled with multiple regulators, including the Justice Department, but the SEC is not one of those regulators. In this case, the SEC alleges that in addition to selling unregistered securities, Binance, Mr. CZ, and Binance US artificially inflated trading volumes, misappropriated customer funds, and failed to restrict U.S. customers’ access to the platform. has accused the company of misleading investors about the market’s supervisory system.

The SEC has identified 12 tokens that Binance offers trading, including BNB and Binance USD (BUSD), as well as Cosmos (ATOM), Solana (SOL), Ada (ADA), Polygon (MATIC), and Filecoin (FIL). It is argued that these fall under the category of securities.

SEC Chairman Gary Gensler has repeatedly stated in public that “Most virtual currencies are securities,” and has maintained the stance that many virtual currencies fall under the jurisdiction of the SEC and are subject to regulation. ing.

In response to the SEC’s arguments, Judge Jackson asked the SEC to define the boundaries of what constitutes a security when it comes to virtual currencies.

Investment contract definition

In determining what constitutes a security, it is important to determine whether a token fits the definition of an investment contract as set out in the Securities Act of 1933 and a 1946 Supreme Court decision.

The Howey test is used to determine whether an investment contract is an investment contract, one of which is “investing funds in a common business with a reasonable expectation of profit from the efforts of others.” There are requirements.

Binance and the SEC have very different views on this point.

Binance’s lawyers argued that the company has no obligations to investors after selling certain tokens, but it does have obligations if the assets are considered securities. The SEC, on the other hand, argued that Binance’s marketing of the token suggests that investors have expectations for returns similar to those in securities investments.

There is also disagreement between the SEC and Binance regarding the sale of tokens on the secondary market.

Binance argues that the initial token sale by the token issuer and the secondary market token sale conducted by Binance do not fall under the “pooling of funds for common business investment”, one of the requirements of the Howie test. did.

On the other hand, the SEC argues that if the token itself has the characteristics of a security, it is still a security no matter how it is sold. He added that creating a secondary market for the token is a means to help increase its value, which investors are hopeful about.

The SEC also argued that the stablecoin BUSD issued by Binance should similarly be considered a security because it was sold as a “package” with the yield service provided by Binance.

Important points in deliberations

Lawyer James Murphy, who is familiar with the three areas of virtual currency and the web, summarized the main points of this deliberation in X. Here, we will summarize important points from the content.

SEC v. @Binance hearing, Update I

Judge Berman Jackson has dispensed with the prepared arguments and gone straight to questions.

She started with the defense team.

-She doubted that an investment contract actually requires a contract.

-She focused on the “scheme”…

— MetaLawMan (@MetaLawMan) January 22, 2024

• Judges skeptical that investment contracts require actual contracts
• Judge is skeptical that BUSD was offered as an investment contract
• The judge appears to accept the argument that the BNB token was originally offered as an investment contract.
• The judge is not convinced that tokens, even if initially offered as investment contracts, can continue to be considered securities on the secondary market.
• Ripple’s discussion on XRP’s securities nature is evaluated as a “thoroughly thought-out opinion”
• The application of the “serious problem principle” (the need for special permission from the U.S. Congress) is not persuasive.
• There will be no separate hearings on the 10 tokens that are the subject of the lawsuit (Filecoin is mentioned)
• The SEC claims that tokens “embody” investment contracts, contradicting the argument in the Coinbase case that “the tokens themselves are computer code” (Murphy’s opinion).

The SEC has also filed a lawsuit against major U.S. exchange Coinbase for offering unregistered securities, and a deliberation was held on the 17th of last week.

The results of these two lawsuits are expected to have a major impact on the definition of the SEC’s jurisdiction over the virtual currency sector in the United States, and are attracting attention both within and outside the industry.

connection:U.S. District Judge speaks in favor of Coinbase in lawsuit against SEC

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