The SEC Is Coming for Binance. Again.

America's securities regulator shows no sign of backing off its fights with law-flouting 'crypto' operators despite uncertainty over how November's election plays out.

The United States Securities and Exchange Commission (SEC) continues to pursue legal action against major cryptocurrency exchanges and operators, despite the upcoming presidential election and its potential impact on the regulatory landscape.

On Friday, October 16, the SEC filed a proposed amended complaint in its long-standing lawsuit against Binance Holdings, Binance.US, and Binance founder Changpeng "CZ" Zhao. The SEC filed its initial suit over a year ago, accusing the companies of selling unregistered securities, masking manipulative trading on Binance.US, and allowing U.S. customers to illegally access the Binance.com site.

The SEC alleged that Binance and CZ engaged in "an extensive web of deception, conflicts of interest, lack of disclosure and calculated evasion of the law." The SEC provided a preview of the gist of the 201-page amended complaint last month, seeking to “address the factual pleading deficiencies” in the June 28 ruling by Judge Amy Berman Jackson of the U.S. District Court for the District of Columbia and to “further address certain defense arguments challenging the SEC’s claims.”

That June ruling saw Berman decline Binance's motion to dismiss the bulk of the SEC's charges, although she did dismiss the charge that Binance's role in the (now defunct) BUSD stablecoin partnership with Paxos Trust represented an investment contract between the exchange and its customers.

Berman also partially dismissed charges related to Binance's initial coin offering (ICO) of its in-house BNB token and the post-ICO ‘secondary’ sales of BNB to customers on exchanges. Regarding the latter charge, Berman cited a different federal court’s ruling that ‘secondary’ sales of Ripple Labs' XRP token on exchanges didn't violate securities law.

In response, the SEC's amended complaint builds on its original ICO references by adding the phrase “initial exchange offerings” (IEO). This is described as “typically, the initial distributions of the crypto asset by the issuer or promoter to investors using trading platforms as the primary means of distributions.” The SEC singles out Binance's Launchpad, “a program Binance explicitly designed for issuers to engage directly in capital-raising distributions of their crypto assets” via the exchange.

The SEC notes that as recently as September 5, Binance's website describes its prominent role in the IEO process, letting token-issuing projects focus on development “while we handle the marketing and exposure to our user base.” The SEC argues that the tokens' presence on Binance leads buyers “to reasonably expect profits from the expanded presence of the crypto assets on trading platforms.”

The SEC hasn't given up on labeling BNB a security, as the amended complaint included a lengthy new section on Binance's efforts to promote and sell BNB both to its staff and outsiders, as well as its promotion of Binance's role in boosting BNB's value. Binance also offered BNB to staff as “an elective form of salary payment,” which the SEC claims Binance promoted as the equivalent of stock options and an investment in the exchange's future.

The SEC also seeks to revive the dismissed charge against Binance's Simple Earn program, in which customers ‘lent’ tokens to Binance in exchange for simple interest. Berman's June ruling said the SEC failed to demonstrate that customers understood the interest came from Binance's “managerial or entrepreneurial efforts.”

In response, the SEC notes how Binance promoted Simple Earn as ‘passive investing’ that allowed a “hands-off approach to managing their portfolios.” Binance told Earn customers that their assets would be pooled with others' assets, with Binance deciding how those assets are deployed.

Following Berman's partial dismissal of the BNB charge in June, a hearing was held in July in which SEC and Binance attorneys debated whether 10 other tokens—ADA, ALGO, ATOM, AXS, COTI, FIL, MANA, MATIC, SAND, and SOL—cited in the SEC's original complaint were still part of the suit. The amended complaint retains references to all 10 tokens and cites details on how the tokens were promoted by Binance on its platforms.

“Statements and activity by the crypto asset issuers and promoters, as amplified and reinforced by Defendants as alleged herein, have led investors reasonably to expect profits based on the managerial or entrepreneurial efforts of others.” The SEC claims this expectation exists regardless of whether investors acquired the token via “initial token distributions” (including IEOs on Binance), though “issuer direct or indirect sales” including via market makers, or in “secondary market resales” on Binance.

However, the amended complaint expunges the “crypto asset securities” language that has annoyed some judges overseeing other SEC v crypto suits, which the SEC has acknowledged can be problematic. The SEC now uses the phrase “crypto assets that were offered or sold as securities,” with ‘securities’ encompassing “the full set of contracts, expectations, and understandings centered on the sales and distribution” of an asset (as defined by the Howey test).

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