Binance, Binance.US, and Changpeng Zhao, popularly known as “CZ,” have responded to the U.S. Securities and Exchange Commission’s (SEC) lawsuit, asserting that the SEC did not meet the requirements of the “Howey Test.” In a recent filing, the cryptocurrency exchange and its founder argued that the SEC’s allegations did not apply to the actual conduct under scrutiny.
Binance and CZ question SEC’s application of the “Howey Test”
In their response to the SEC’s lawsuit, Binance and CZ, along with Binance.US, questioned the SEC’s interpretation of the “Howey Test.” The “Howey Test” is a legal framework used to determine whether a particular transaction qualifies as an “investment contract” and thus falls under securities regulations.
The cryptocurrency entities argued that the SEC failed to demonstrate that Binance’s U.S. customers entered into contracts that met the definition of an “investment contract.” They also contended that other elements required by the Supreme Court’s interpretation of the “Howey Test” were not satisfied.
Binance’s ongoing legal battle with U.S. regulators
This response marks the latest effort by Binance to have the SEC lawsuit dismissed. The SEC initially filed the lawsuit in June, alleging that Binance and Binance.US had allowed the public to purchase and trade unregistered securities by listing certain cryptocurrencies and providing a staking service.
Binance, which recently settled unrelated charges with various U.S. regulatory bodies, including the Department of Justice (DOJ), Commodity Futures Trading Commission (CFTC), Office of Foreign Asset Control (OFAC), and Financial Crimes Enforcement Network (FinCEN), filed a motion to dismiss the SEC lawsuit in September.
In that motion, Binance argued that the SEC was overreaching its authority, a similar argument it had made earlier in a motion to dismiss the CFTC lawsuit in July.
SEC challenges Binance’s settlements with other agencies
The SEC, in response to Binance’s arguments, cited the cryptocurrency exchange’s recent settlements with other U.S. regulatory agencies. It asserted that these settlements demonstrated that Binance was fully aware of its operations in the United States, serving U.S. customers, and utilizing U.S. infrastructure for transactions.
The SEC argued that these settlements and the associated guilty pleas and consent orders should be considered as evidence that Binance was conducting business in the U.S. while not complying with U.S. securities regulations. It asserted, “Zhao’s and Binance’s plea agreements and the Consent Order provide further grounds for this Court to deny the Joint Motion to Dismiss.”
Binance disputes the applicability of securities laws
In a separate filing on the same day, Binance challenged the SEC’s contention that securities laws applied to its operations. It argued that securities laws were distinct from the Bank Secrecy Act (BSA) and the International Emergency Economic Powers Act, two laws under which Binance and CZ had settled charges.
Binance contended that the jurisdictional admissions under the BSA did not bring the SEC’s claims within the purview of securities laws. Additionally, it stated that the settlements and consent orders related to the BSA and other laws did not imply any violations of securities regulations.
The filing emphasized,
“The facts in the plea agreements with the Department of Justice show that BHL and Mr. Zhao violated the Bank Secrecy Act (BSA) does not say anything about whether there was fair notice of the SEC’s theory that the crypto assets at issue were securities under the Securities Act or the Exchange Act.”
As Binance, Binance.US, and CZ continue to contest the SEC’s allegations, the outcome of this legal battle remains uncertain. The dispute revolves around the application of the “Howey Test” and whether Binance’s actions constituted the sale of unregistered securities.
The cryptocurrency industry closely watches this case, as it could set a significant precedent for regulatory oversight in the crypto space. While both sides present their arguments, the final judgment will determine whether the SEC’s lawsuit against Binance and CZ proceeds or is ultimately dismissed.