On June 5, 2023, the SEC filed a complaint against Binance Holdings Limited (“Binance”) and its founder, Chengpeng Zhao (“Zhao”), for operating an unregistered exchange, broker-dealer, and clearing agency under an intentional deceptive scheme that was designed to evade U.S. regulation.. The SEC also brought action against BAM Management and BAM Trading, U.S. entities related to Binance, for the same violations and for charges of securities fraud related to those entities’ alleged misleading statements and practices. The next day, on June 6, 2023, the SEC filed a complaint against Coinbase, Inc. and Coinbase Global, Inc. (together “Coinbase”) for operating its trading platform as an unregistered securities exchange, broker, and clearing agency. While the complaint against Coinbase does not allege fraud or a deliberate attempt to evade U.S. regulation, the SEC’s complaint also alleges that Coinbase failed to register the offer and sale of its crypto asset staking-as-a-service program.
While the two complaints differ insofar as Binance is accused of fraud and intentional evasion, they also overlap insofar as both are accused of operating as unregistered securities exchanges, broker-dealers, and clearing agencies, as well as making unlawful public offers and sales of securities in violation of Section 5 of the Securities Act. Both complaints explain at length the Commission’s view that certain identified crypto assets traded on each platform are securities. And indeed, alleging (and, ultimately, proving) that these platforms provided a market for and facilitated the exchange of securities is a necessary precondition for all of the Commission’s charges.
While these enforcement actions did not come as a surprise to many observers given the SEC’s aggressive public statements about the crypto space, the enforcement actions against both companies are still significant. First, Coinbase is the largest crypto asset trading platform in the United States, and it facilitates billions of dollars in daily trading volume in hundreds of crypto assets. Second, in contrast to most other crypto exchanges, Coinbase is a U.S. public company, has audited financial statements, and files extensive disclosures with the SEC. Indeed, it went public in 2021, and its registration statement was approved by the SEC during the current administration. Lastly, in contrast to the Commission’s claims against Binance, the SEC does not allege that Coinbase mishandled investor assets. Rather, the SEC alleges that Coinbase’s failure to register “deprived investors of significant protections, including inspection by the SEC, recordkeeping requirements, and safeguards against conflicts of interest…”
Binance, despite having a U.S.-footprint that is smaller than Coinbase, is the world’s largest crypto platform, with trading volumes several times that of Coinbase and other competitors. The SEC’s action is likely to reverberate beyond the exchange’s U.S. operations, into the wider crypto market. There will likely be heightened scrutiny towards Binance given the allegations of fraud and mishandling of customer assets contained in the Commission’s complaint, which echo allegations levied against FTX-related parties earlier this year. Further, regulators are unlikely to look kindly on Binance’s alleged concerted efforts to avoid oversight. And indeed, it has been widely reported that the U.S. Department of Justice is also investigating the trading platform.
SEC V. BINANCE HOLDINGS LIMITED, ET AL.
On June 5, 2023, the SEC filed a complaint against Binance and its founder, Zhao, for operating an unregistered exchange, broker-dealer, and clearing agency. The SEC’s charges also include claims against Binance’s U.S. operations—BAM Management and BAM Trading (collectively “BAM”)—for additional supposed misconduct relating to those entities’ alleged misleading statements and practices. While the SEC often seeks a temporary restraining order ex parte when filing its complaints, here the SEC waited until the next day to do so, and on June 6, 2023, the SEC moved the court for temporary injunctive relief in the form of a freeze on BAM’s U.S.-based assets and an order for BAM, Binance, and Zhao to repatriate any BAM assets transferred offshore. In response to the SEC’s motion, the parties agreed to terms addressing most of the SEC’s concerns through a consent order, which was entered by the court on June 17, 2023.
The SEC’s June 5, 2023 complaint focuses in significant part on conduct alleged in the complaint the agency would file against Coinbase on June 6, 2023—i.e., that Binance was operating as unregistered securities exchange, broker-dealer, and clearing agency. Both the Binance and Coinbase complaints also devote significant ink to explaining how, in the SEC’s view, certain crypto assets traded one or both of the platforms are securities. And indeed, in both cases, proving that the relevant platforms provided and facilitated the exchange of securities is a preliminary hurdle the Commission faces in proving its Exchange Act Sections 5, 15, and 17A claims. Unlike Coinbase, however, the Binance complaint also includes allegations of fraud, under Section 17(a) of the Securities Act (but, notably, not Exchange Act Section 10(b)/Rule 10b-5), and other wrongdoing beyond a failure to register. The SEC’s complaint against Binance (and, for that matter, Coinbase) indicates the Commission’s concern regarding the conflicts of interest the agency contends are inherent in the vertical integration of the exchange’s business, in which one party controls all aspects of a transaction without any of the regulatory or third-party oversight that normally occurs when the exchange, broker dealer, and clearing agency functions are operated by separate entities.
The SEC’s June 6, 2023 motion requested a temporary asset freeze and preliminary injunction based on the SEC’s claim that Binance.US customer assets were under the control of Binance Holdings and Zhao, as opposed to the licensed U.S. entity, BAM Trading. The SEC’s complaint also alleges facts that suggest Binance and Zhao engaged in self-interested transfers of Binance.US customer assets, both fiat and crypto, that served no cognizable business purpose. Those allegations, taken in conjunction with Binance and Zhao’s public statements about avoiding regulatory oversight and reducing losses, appear to have triggered the Commission’s apparent concern that another FTX-like situation could occur and customer accounts would be depleted of assets. Binance vehemently opposed the motion, arguing that the SEC had manufactured the emergency and customer assets were not at risk.
The June 17, 2023 consent order essentially requires the defendants to repatriate and then build a wall between BAM Trading assets (i.e., the assets associated with Binance.US accounts and U.S. customers) and Binance, its associated entities, and Zhao. However, aside from these limitations, the Order largely maintained the pre-suit status quo and allowed the named entities to continue business as usual in the United States. The Order requires the defendants to provide the SEC with substantial information about Binance.US and Binance.com accounts, and their associated beneficial owners, but this is presumably information the SEC could obtain during normal discovery. Although the SEC prepared legal arguments for the District Court’s jurisdiction over Binance and Zhao, the parties stipulated to the court’s authority for the purposes of the consent order, though both Binance and Zhao retained the right to contest jurisdiction later in the litigation.
Although both sides touted the agreement as a win, Binance took issue with the SEC’s description of the Order and claimed a Commission press release misleadingly described the parties’ agreement. Binance even moved for an order to direct the SEC to “Comply with Applicable Rules of Conduct,” arguing the press release was misleading because the SEC had not provided any evidence that customer funds were mishandled or commingled and the press release may create bias against the company. The Court denied Binance’s request stating it was not its role to “get involved in wordsmithing” press releases and that it was not clear the SEC’s release materially affected the proceedings.
II. The Key Factual Allegations in the SEC’s Complaint
The SEC has leveled six primary claims against Binance for violations of securities laws relating to the sale and offer of unregistered securities, operating as an unregistered exchange, broker dealer and clearing house, and for violations of the anti-fraud provisions of the Securities Act.
A. The SEC alleges that Binance and Zhao formed BAM Trading as a means to evade the US regulatory system
The SEC argues that BAM Trading was intended to act as a “Tai Chi” entity, to take the brunt of U.S. regulatory attention. According to the SEC, the goal was that, from a regulatory perspective, Binance.US would portray itself as a U.S.-licensed entity that was independent from Binance in order to allow Binance and Zhao to access the valuable U.S. market and maintain control of the US business, while avoiding oversight from U.S. regulators.
According to the SEC, notwithstanding the outward appearance, Zhao was the beneficial owner and controlling shareholder of BAM Trading’s parent company, BAM Management. And, from inception, control over BAM Trading’s bank accounts and crypto assets allegedly rested with Zhao and Binance. The “Service Level Agreements,” the “Wallet Custody Agreement,” software licensing agreements, and other agreements between Binance and BAM Trading—in addition to Binance having authority over BAM Trading’s U.S. bank accounts—meant that Binance and Zhao had control over the key elements of the U.S. platform’s operations. Further, the SEC alleges that Zhao and Binance also controlled the entities Binance.US relied on to execute and generate trade volume –for instance, Sigma Chain, a trading firm operated by Binance employees and wholly owned by Zhao, was during some periods the sole counterparty for Binance.US “One Click Buy Sell” and “Convert” services.
B. The SEC alleges that Binance’s proprietary tokens, BNB and BUSD, are securities.
The SEC also alleges that the native token of the Binance platform—BNB—is an unregistered security sold to investors to raise capital to fund Binance product development, specifically the exchange. The complaint explains that Binance created a finite amount of BNB and sold the tokens to “investors” through an ICO. Binance reserved 40% of all BNB for the “founding team” and periodically issued BNB tokens to employees as compensation. Binance pledged to “burn” half of BNB over time, periodically purchasing BNB tokens with Binance.com profits. While the SEC’s complaint and request for injunctive relief focus on BNB and BUSD, its U.S. dollar-pegged stablecoin, the Commission also alleges Binance offered and sold its “BNB Vault” and “Simple Earn” programs as unregistered securities, and that BAM Trading offered and sold its “staking-as-a-service” program as an unregistered security. Aside from Binance’s proprietary crypto assets, the SEC also alleges that the following crypto assets offered on the Binance Platforms are securities: SOL, ADA, MATIC, FIL, ATOM, SAND, MANA, ALGO, AXS, and COTI (the Key Takeaways section below discusses the broader implications of these allegations).
C. The SEC alleges that Binance was aware that it was operating Binance.com and Binance.US as unregistered U.S. securities exchanges
The SEC alleges that Binance.com and Binance.US each operated as an unregistered securities exchange in violation of U.S. securities laws because they provided platforms for the exchange of the tokens described above. While BAM and Binance.US are already subject to U.S. securities laws as U.S. entities, the claims against Binance and Binance.com allege that not only were they operating an unregistered securities exchange, but that Binance was also covertly allowing U.S. persons to trade through Binance.com.
From 2017 to 2019, Binance allowed U.S. persons to buy, sell, and trade crypto assets. According to the SEC’s complaint, Binance was aware at least some of its Binance.com customers were located in the U.S. based on IP addresses and “Know Your Customer” (“KYC”) identity verification information. In 2018, prior to the formation of Binance.US, the Binance CCO allegedly told other Binance employees that he believed they were operating an unlicensed U.S. securities exchange (Binance.com). In 2019, Zhao and Binance formed Binance.US through a partnership with BAM. Although U.S. IP addresses were thereafter blocked from accessing Binance.com and redirected to Binance.US, the SEC alleges that Zhao and Binance employees helped the most lucrative U.S. clients evade these restrictions in order maintain their business through Binance.com. The SEC supports this contention with another quote from Binance’s CCO, who allegedly stated that Binance “cannot be seen to have US users … we should get them through other creative means.”
D. The SEC Alleges that BAM “deceived investors into thinking that the trading volumes on the platform were robust, real, and reliable”
The SEC also claims that BAM touted its “robust efforts” to “monitor and prevent” manipulative trading when soliciting “investors.” The SEC alleges that BAM was aware that manipulative trading was not only possible on the platform, but that it was prevalent. In fact, the SEC claims that BAM was not providing its trade surveillance company the access and information necessary to actually monitor for manipulative trading. Per the SEC, despite knowing its efforts to prevent manipulative trading were ineffective, BAM Trading released, and touted, overstated Binance.US trading volumes without any additional disclosure.
E. The SEC Alleges that Binance and Zhao’s control over BAM Trading allowed for improper control over customer assets
Finally, the SEC alleges that Zhao and other Binance personnel held signatory authority over trust accounts holding BAM Trading customer assets, and that Binance (and not BAM Trading) provided and controlled the digital wallets holding Binance.US customers’ crypto assets. The Commission also alleges that from 2019 to 2021, a Merit Peak Binance.US account received over $22 billion in funds consisting “in significant part of Binance Platforms customers’ assets, including those of Binance.US Platform customers.” And according to the SEC’s motion, a significant portion of the funds passed through Merit Peak’s account from various Zhao- and Binance-controlled sources, and were eventually deposited with a New York limited purpose trust company.
Similarly, the SEC alleges that from 2019 to 2023, Sigma Chain’s U.S. bank accounts received approximately $500 million–primarily from Binance and BAM Trading. The SEC alleges Binance customer funds were commingled with non-customer funds through Merit Peak and Sigma Chain because both entities received deposits from Key Vision Development Limited, an entity that the SEC claims was created to “accept” Binance customer deposits. Despite the allegations, the complaint and motion do not allege a purpose for these transactions.
III. Alleged Securities Law Violations
Based on these allegations, the SEC contends that Binance violated Section 5 of the Securities Act; that Binance, BAM Trading, and Zhao violated Sections 5, 15(a), and 17A of the Exchange Act; and that BAM Management and BAM Trading violated Section 17(a) of the Securities Act. Despite the seeming ongoing nature of the alleged violations, the Commission consented to an order that permitted Binance.US to continue its operations in the United States.
A. Section 5 of the Securities Act – Offer and Sale of Unregistered Securities (Against Binance)
The SEC claims that pledging to use Binance’s profits to support the price of the BNB token gave investors a reasonable expectation of profits while tying the success of the token to the efforts and success of Binance. In its motion for injunctive relief, the SEC alleges the BNB token is “indistinguishable” from the token at issue in SEC v. LBRY, Inc., 2022 WL 16744741 (D.N.H. Nov. 7, 2022), in which the U.S. District Court for the District of New Hampshire granted summary judgement in favor of the SEC and found that LBRY’s LBC token was a security. Accordingly, the SEC alleges that Binance violated Section 5 of the Securities Act by offering and selling BNB without registration.
B. Sections 5, 15(a), 17A of the Exchange Act – Operating as an Unregistered Exchange, Broker-Dealer, and Clearing Agency (Against Binance, BAM Trading, and Zhao)
The SEC alleges that the Binance platforms serve as both unregistered exchanges and unregistered broker-dealers because they simultaneously provide a marketplace for the exchange of securities and facilitate those exchanges for investors (for a fee) in violation of Exchange Act Sections 5 and 15(a). Similarly, because the Binance platforms act as depositories for investor assets and act as intermediaries for the settling and clearing of trades, the SEC also argues Binance.com and Binance.US are unregistered clearing agencies in violation of Exchange Act Section 17A.
C. Section 17(a) of the Securities Act – Misleading Statements and Practices Operating as a Deceit or Fraud (Against BAM Management and BAM Trading)
Finally, the SEC argues that BAM’s statements regarding efforts to prevent manipulative trading were both false and material. For instance, according to the SEC, investors relied on trading volumes to assess the performance of the Binance.US platform. However, according to the Commission, BAM did not take any steps to ensure the information relayed to investors regarding trading volume and surveillance was accurate, nor did BAM provide investors adequate disclosures to ensure its statements regarding trade volume were not otherwise misleading. The SEC’s complaint goes further to state that BAM was aware that a portion of the manipulative trading on the Binance.US platform came from accounts affiliated with Sigma Chain, an entity the SEC says is controlled by Zhao and operated by Binance. The Sigma Chain accounts allegedly engaged in manipulative trading that resulted in the overstatement of Binance.US’s trade volumes at critical times in Binance’s development. But, notwithstanding the allegations, the SEC charges only the negligence-based versions of Securities Act Section 17(a)(2) and (3); they do not charge Exchange Act Section 10(b)/Rule 10b-5. It is unclear whether this is due to an absence of evidence of scienter or another issue, such as the Commission’s inability to satisfy Morrison’s requirement of a domestic securities transaction. Further, the lack of Securities Act Section 17(a)(1) and Exchange Act Section 10(b) charges is also interesting given the reports of a DOJ investigation, which would involve scienter-based allegations.
SEC V. COINBASE, INC.
I. Wells Notice
While significant, the Coinbase complaint was not unexpected. As previously discussed on this blog, Coinbase disclosed in March 2023 that it had received a Wells Notice from the SEC Staff, signaling the Division of Enforcement’s intent to recommend to the Commission an enforcement action against the platform. And, in April 2023, Coinbase publicly released a lengthy Wells response to the Staff’s notice, which focused on three main points:
- The SEC’s April 2021 approval of Coinbase’s initial public offering and the fact that Coinbase’s business has not materially changed since going public;
- The SEC’s use of untested legal theories that are foreclosed by various constitutional and equitable defenses; and
- Coinbase’s contention that it does not list securities, in part because all sales on its platform are secondary sales that do not create a contractual relationship with any issuers.
II. The Key Factual Allegations in the SEC’s Complaint
The SEC’s complaint centers on the allegation that Coinbase (i) operates as a crypto exchange, broker, and clearing house, (ii) listed crypto assets that were and are securities, and (iii) failed to register as a securities exchange, broker and/or clearing house. Ultimately, the Coinbase suit, like portions of the litigation against Binance, will turn on whether the SEC can demonstrate that certain of the crypto assets traded on the exchange are, in fact, securities.
A. The SEC Alleges that Coinbase Operates as an Unregistered Broker, Exchange, and Clearing House
The SEC alleges that, since at least 2019, Coinbase has operated as an unregistered broker by, among other things, “soliciting potential investors, handling customer funds and assets, and charging transaction-based fees” for its investment and transaction related services. The SEC also alleges that Coinbase operates as an unregistered securities exchange by, among other things, “providing a market place that…brings together orders of multiple buyers and sellers of crypto assets and matches and executes those orders.” Finally, the SEC alleges that during the same period Coinbase operated as an unregistered clearing house by, among other things, “holding its customers’ assets in Coinbase-controlled wallets and settling its customers’ transactions by debiting and crediting the relevant accounts.”
As it did in Binance, the SEC’s complaint notes that the function of an exchange, broker, and clearing house are traditionally separated in the securities industry. And according to the SEC, structuring these functions as separate legal entities that are independently registered and regulated by the SEC minimizes conflicts of interest between the intermediaries and investors. By collapsing these functions into a single platform, and by failing to register any of the three functions with the SEC, the SEC alleges that Coinbase maximized its profits while “evading the disclosure requirements that Congress and the SEC have constructed for the protection of the national securities markets and investors.”
B. The SEC Alleges that Coinbase Failed to Register its Staking-as-a-service Program
The SEC’s complaint also alleges that, since 2019, Coinbase has engaged in unregistered securities offerings through its staking-as-a-service program (“SaaS”), which allows customers to earn profits from the “proof of stake” validation mechanisms of certain blockchains and Coinbase’s efforts. Specifically, through the staking program, investors’ crypto assets are “transferred to and pooled by Coinbase (segregated by asset), and subsequently ‘staked’ (or committed) by Coinbase in exchange for rewards, which Coinbase distributes pro rata to investors after paying itself a 25-35% commission.” The SEC alleges that the program qualifies as an unregistered securities offering under Howey because profits depend on Coinbase’s efforts to leverage its experience and expertise to generate returns.
However, Coinbase and other staking services dispute this characterization of SaaS – they claim customer assets are never at risk and any profits from staking are generated according to the relevant blockchain protocol—not the efforts of others (i.e., Coinbase). According to Coinbase, their only role in the staking process is to provide the technological medium for customers to validate and stake their assets on the blockchain, amounting to an “IT service.” Nevertheless, the SEC claims that Coinbase failed to register its offers and sales of its staking program when it was required to do so, and that no exception to the registration requirement applied.
C. The SEC Alleges that Certain Crypto Assets on Coinbase are Securities
In its complaint, the SEC alleges that at least 13 crypto assets on Coinbase, including several popular tokens, are securities under federal law. These tokens include, but are not limited to, some of the largest, longstanding, and most well-known crypto assets on the market, including SOL, ADA, MATIC, and DASH.. Even with such well established tokens, the Commission’s complaint focuses on promotional efforts by the entities responsible for creating and maintaining the token networks and the inventory of such token that the issuers maintain for themselves. It is important to note that the Commission need only to succeed in proving one token traded on the exchange is a security in order for Coinbase to face Securities Act Section 5 liability.
Apparently seeking to blunt Coinbase’s “fair notice” arguments, the SEC claims that Coinbase has long been aware that certain crypto assets may qualify as securities, based on SEC enforcement actions classifying the assets as securities, and has even taken certain steps to prevent those tokens from being listed on its platform. The complaint states that, “[r]ecognizing that at least certain crypto assets were being offered, sold, and otherwise distributed by an identifiable group of persons or promoters, in or around September 2018 … Coinbase’s listing application required issuers and promoters to provide information about their crypto assets and blockchain projects. It specifically included requests for information relevant to a Howey analysis of the crypto asset.” The SEC’s complaint goes on to note that “in or around September 2019, Coinbase and other crypto asset businesses founded the Crypto Rating Council (“CRC”), which released a framework for analyzing the likelihood that certain crypto assets were securities.
According to the SEC, Coinbase recognized the risk that certain tokens available on its exchange had the characteristics of securities, but chose to ignore those risks in order to prioritize growth and profitability. And the SEC’s complaint ultimately accuses Coinbase of “paying lip service to its desire to comply with applicable laws,” while making available for trading “crypto assets that are investment contracts under the Howey test and well-established principles of the federal securities laws.”
III. Alleged Violations of Securities Law
Based on these allegations, the SEC claims that Coinbase’s operations violate Sections 5, 15(a), and 17A(b) of the Exchange Act, and its staking program violates Sections 5(a) and 5(c) of the Securities Act. Despite the seemingly ongoing nature of the violations alleged, the Commission again did not seek a temporary restraining order or preliminary injunction.
IV. Coinbase’s Answer to the SEC’s Complaint
On June 28, 2023, Coinbase filed a 177-page answer and motion for leave to file a motion for judgment on the pleadings, to dismiss the complaint outright. The arguments advanced in Coinbase’s answer briefing are similar to those put forward in its April 2023 Wells response and include the following:
- First, Coinbase argues that the SEC failed to provide “fair notice.” Rather, the SEC approved Coinbase’s registration as a public company in April 2021, and, when so doing, the SEC did not mention that Coinbase was required to register as an exchange or that any of the crypto assets traded on its platform were securities. Coinbase also cites a number of public statements by SEC Chairman Gary Gensler suggesting that the crypto industry fell into a “regulatory gap,” and that the SEC’s authority to regulate the space was unclear. Essentially, Coinbase notes that the Commission now claims that Coinbase’s entire business is illegal, but the same Commission approved the company’s registration statement just two years ago, letting it begin to sell shares to the investing public.
- Second, Coinbase argues that the assets traded on Coinbase’s platform fall outside the SEC’s authority because they are not “investment contracts” but rather “stand-alone asset sale[s].” Coinbase argues that the crypto assets at issue are not securities because buyers and sellers are simply exchanging assets that are not tied to any continuing contractual obligations. Coinbase further argues that the value Coinbase customers receive from assets traded on its platform is the value inherent to the asset itself, rather than value derived from a connection between the asset and the value of the business that generated it. Moreover, the tokens can cease to have status as securities as the blockchains that host them become increasingly decentralized.
- Lastly, Coinbase invokes the “major questions doctrine,” arguing that the SEC lacks authority to regulate crypto absent clear congressional delegation. Citing West Virginia v. EPA, 597 U.S. (2022), Coinbase argues that the major questions doctrine requires the court to reject the SEC’s “novel construction” of the securities laws “in deference to Congress’s prerogative to choose for itself how to regulate “a significant portion of the American economy.” Coinbase argues that “when an agency ‘claims to discover in a long-extant statute an unheralded power to regulate a significant portion of the American economy,’ absent ‘clear congressional authorization’ the courts will not accept an agency’s ‘novel’ statutory construction — even if ‘colorable’ or ‘plausible.’”
During a July 13, 2023 initial pre-trial conference, the court indicated early interest in Coinbase’s counterarguments – pressing the SEC attorneys on both the Commission’s approval of Coinbase’s S-1 and the major question doctrine, based on Chair Gensler’s comments regarding the lack of regulatory authority over crypto exchanges.
IMPORTANT TAKEAWAYS FROM BINANCE AND COINBASE
It is not clear how the Coinbase or Binance suits will play out, nor is it possible to predict with certainty how the cases will impact the larger crypto industry. Notably, between the Binance and Coinbase complaints the SEC has now alleged that majority of the twelve largest crypto tokens by market capitalization—excluding only BTC, ETH, LTC, DOGE, and two stablecoins (Tether and USDC)—are securities. Prior SEC complaints avoided discussing mainstream digital assets as securities. To many, the tokens mentioned in Coinbase and Binance, such as SOL and ADA, were previously considered “safe” non-securities that were issued in a manner the industry believed was compliant. Through these complaints, however, the Commission has pointedly called out the biggest names in crypto. Now, the SEC will need to prove that at least one of these coins independently meets the definition of a security, which will no doubt result in extensive litigation between the Commission, the parties, and other stakeholders.
While outside of the scope of this post, one also cannot ignore the impact of the July 13, 2023 ruling in SEC v. Ripple Labs, Inc., wherein the district court granted portions of the defendants’ motions for summary judgment and specifically found both that the XRP token was not itself a security and that sales of XRP on exchanges—which presumably included both Coinbase and Binance—were not sales of investment contracts. As a result, such sales were not required to be registered under Securities Act Section 5. As it stands, this ruling certainly complicates (and potentially defeats) many of the Commission’s claims against Binance, and potentially eviscerates the Commission’s case against Coinbase.
Both Coinbase and Binance are well funded and have the resources and inclination to marshal sophisticated legal defenses. Absent an early win on a motion to dismiss, the litigation is going to be protracted and hard fought, and unlikely to provide the industry any clarity for an extended period. For now, the cases carry potentially existential stakes for the exchanges and the tokens they list, with the only clear regulatory position being the current Commission’s apparent view that essentially all digital tokens are securities.
To subscribe to the Debevoise Fintech Blog, click here.
We would like to give a special thanks to Debevoise summer associate Daniel Hoff for his contributions to this post.
 BAM Management US Holdings Inc. (“BAM Management”) is a U.S. holding company of which CZ is a beneficial owner and controlling shareholder. BAM Management is the parent company to BAM Trading.
 BAM Trading Services Inc. (“BAM Trading”) is a U.S.-based entity holding business licenses in 46 states and the District of Columbia. BAM Trading licenses exchange software and other services from Binance to operate the Binance.US platform.
 Binance.US Platform (“Binance.US”) is a digital exchange platform available to U.S. based customers to buy, sell, and trade crypto assets. The platform uses Binance software and was formed via a partnership between BAM and Binance.
 Sigma Chain AG: A Swiss-based entity that acted as the “main market maker for Binance.com,” as well as a market maker and “over-the-counter” trader on Binance.US. The firm is wholly owned by CZ, though a separate Binance employee served as a signatory over its U.S. bank accounts.
 “One Click Buy Sell” allowed users to quickly exchange USD for crypto assets. “Convert” services exchange one crypto asset for another. As of June 13, 2023, Binance.US no longer allows fiat for crypto exchanges.
 For the purposes of this allegation, the SEC complaint uses “investor” to refer to “private investors in BAM Management” and “investors (including retail and institutional investors) seeking to transact on the Binance.US Platform.”
 Merit Peak is a CZ-owned trading firm that acted as an OTC trading partner on Binance.com and a “market maker” for Binance.US. CZ was the beneficial owner of Merit Peak and a separate Binance employee was the signatory for the firm’s bank accounts. In its Binance.US information form, Merit Peak stated it was a proprietary trading firm, trading with CZ’s personal wealth.
 See Morrison v. Nat’l Austl. Bank, 547 F.3d 167 (2d Cir. 2008) (finding no cause of action under Section 10(b) for misconduct connected securities traded on foreign exchanges).
 It is also worth noting that DASH was first issued in 2014, well outside of the SEC’s five-year statute of limitations for pursuing a Securities Act Section 5 claim against the issuer. See our previous post discussing the statute of limitations relevant to the SEC’s claims against token issuers.