Landmark SEC Case Against Binance Sparks Federal Review on Digital Assets as Securities

The U.S. District Court to assess SEC's treatment of digital assets and Howey test applicability in high-stakes Binance lawsuit.

Federal Judge Amy Berman Jackson, who is presiding over the case brought by the United States Securities and Exchange Commission (SEC) against Binance, Binance.US, and their former CEO Changpeng Zhao, has called for a court examination of whether digital assets are securities.

In a minute order issued on January 18 in the U.S. District Court for the District of Columbia, Judge Jackson announced that she would entertain arguments on the SEC's approach to cryptocurrencies within the existing regulatory and legal frameworks. Lawyers for Binance.US will be permitted to discuss "whether a digital asset remains a security indefinitely" and the SEC's claims that staking could be deemed a security.

"The Court plans to hear argument on [whether an investment contract must involve a contractual undertaking and] whether the SEC 'misinterprets the meaning of ‘scheme’ in Howey,' from one defense attorney only," Judge Jackson stated. "Although both memoranda address the major questions doctrine, and both raise background questions about whether litigation is the appropriate way for the SEC to proceed to oversee the crypto industry at all, one attorney should be assigned to argue that issue for the defense," she added.

The SEC has traditionally used the Howey test to determine what constitutes a security, by ruling whether an asset fulfills the definition of an investment contract. Judge Jackson brought up this issue, presuming it would need to be addressed in Binance's case over tokens, including BNB and Binance USD (BUSD). The timeline for when both sides will present arguments on this matter remains unclear.

In numerous legal actions against U.S. crypto firms, the SEC has asserted that tokens largely qualify as securities and fall under the commission's regulatory purview rather than that of the Commodity Futures Trading Commission. In July 2023, a judge presiding over the SEC's case against Ripple ruled that the XRP token was not a security concerning programmatic sales on digital asset exchanges.

Following the Ripple ruling, lawyers for Coinbase, which is also facing a lawsuit from the SEC, cited the precedent from the case in an August 2023 motion to dismiss. In other cases, the SEC has countered, arguing in its lawsuit against Terraform Labs and Do Kwon that the question of whether certain tokens were securities was a "legal question" for a court, "not a factual question for the jury."