On March 31, a New York federal court dismissed a proposed securities class-action lawsuit filed against Binance, the world’s largest cryptocurrency exchange. The lawsuit, one of a host of similar actions brought against cryptocurrency exchanges in 2020, was filed by token buyers who purchased cryptocurrency on Binance’s platform.

The plaintiffs asserted that Binance had violated two securities statutes, the Securities Act of 1934 (Securities Act) and the Securities Exchange Act of 1934 (Exchange Act). The Securities Act prohibits the sale of unregistered securities, while the Exchange Act requires securities issuers to make certain disclosures so investors can make informed investment decisions. On April 3, 2019, the Securities Exchange Commission (SEC), released an assessment strategy, “Framework for ‘Investment Contract’ Analysis of Digital Assets” (Framework), which identified the factors for determining whether a digital asset, like cryptocurrency, is an “investment contract” and therefore subject to the Securities Act and the Exchange Act. An “investment contract,” as defined by the U.S. Supreme Court, exists when there is investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others. SEC v. W.J. Howey Co., 328 U.S. 293, 294 (1946). This definition applies to any contract, scheme, or transaction, regardless of whether it possesses any of the characteristics of typical securities.

The plaintiffs contended that Binance violated the Securities Act and the Exchange Act by failing to file a registration statement with the SEC for the tokens it sold and by failing to inform token buyers that their investments were securities rather than digital assets. However, the court did not reach these questions, instead dismissing the lawsuit for untimeliness and extraterritoriality.

1. Untimeliness

The parties agreed that Binance’s latest potential violation of the Securities Act and the Exchange Act occurred in February 2019. However, the plaintiffs did not sue Binance until September 2020, more than one year later. This means that plaintiffs had exceeded the one-year window for filing suit under both statutes. As the court explained, the clock began ticking on the statutory one-year window the moment a violation occurred, not when the plaintiffs learned about the violation. The court also explained that the SEC’s release of the Framework in April 2019 did not stop the clock from running, and thereby extend the one-year window because the Framework did not reveal any new facts about the case, it simply made the plaintiffs aware of the Supreme Court’s definition of an “investment contract.”

2. Extraterritoriality

The court also dismissed the lawsuit because of Binance’s extraterritoriality, or because it was not “domiciled” in the United States, and therefore not governed by U.S. law. Binance’s corporate domicile is currently unknown, as the company maintains no physical corporate headquarters. It does use U.S.-based computer servers, but this and the plaintiffs’ access of Binance’s platform from the United States were both too attenuated to subject Binance to U.S. securities laws.

Our Take

This case provides a snapshot of the tensions resulting from applying preexisting regulations to the digital asset industry. Investors and issuers of digital assets alike are presently attempting to conscientiously navigate the intricacies of an unconfined, rapidly evolving market that was recently legitimized by President Joe Biden’s March 9 executive order. Given these developments, we anticipate that courts will face more cases raising issues like the Binance case that examine the applicability of federal securities laws and regulations in the digital asset realm.

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Photo of Keith J. Barnett Keith J. Barnett

Keith’s experience representing clients in the financial services industry as a litigation, compliance, regulatory, investigations (internal and regulatory), and enforcement attorney spans 20 years. Keith represents clients against government regulators (CFPB, FTC, SEC, CFTC), industry regulators (FINRA), and private litigants in federal courts…

Keith’s experience representing clients in the financial services industry as a litigation, compliance, regulatory, investigations (internal and regulatory), and enforcement attorney spans 20 years. Keith represents clients against government regulators (CFPB, FTC, SEC, CFTC), industry regulators (FINRA), and private litigants in federal courts, state courts, and before arbitration and administrative law panels in the financial services industry.

Photo of Jay Dubow Jay Dubow

Jay co-leads the firm’s Securities Investigations + Enforcement Practice Group. He focuses his practice on complex business litigation, with a special emphasis on defending against shareholder derivative and securities class action litigation. He also represents clients involved in investigations by the U.S. Securities…

Jay co-leads the firm’s Securities Investigations + Enforcement Practice Group. He focuses his practice on complex business litigation, with a special emphasis on defending against shareholder derivative and securities class action litigation. He also represents clients involved in investigations by the U.S. Securities and Exchange Commission (SEC), the Pennsylvania Department of Banking and Securities, and various self-regulatory organizations, including the Financial Industry Regulatory Authority, Inc. (FINRA). He also conducts internal investigations on behalf of clients. Such investigations have included allegations involving the Foreign Corrupt Practices Act (FCPA), whistle blower claims, financial fraud, and civil and criminal violations of various federal and state laws.

Photo of Kalama Lui-Kwan Kalama Lui-Kwan

Kalama represents parties in complex commercial disputes arising out of M&A deals. He also has a national litigation practice representing consumer-facing companies in class actions and regulatory investigations.

Photo of Ethan G. Ostroff Ethan G. Ostroff

Ethan Ostroff’s practice focuses on financial services litigation and consumer law compliance counseling. Ethan is part of the firm’s national practice representing consumer-facing companies of all types in defense of individual and class action claims and counseling them on compliance with federal and

Ethan Ostroff’s practice focuses on financial services litigation and consumer law compliance counseling. Ethan is part of the firm’s national practice representing consumer-facing companies of all types in defense of individual and class action claims and counseling them on compliance with federal and state laws.

Photo of Ghillaine Reid Ghillaine Reid

Ghillaine co-leads the Securities Investigations + Enforcement Practice Group at Troutman Pepper. She focuses her practice on government and securities regulatory investigations, financial services litigation, commercial litigation, and corporate compliance. Drawing on her experience in government service and private practice, Ghillaine regularly represents…

Ghillaine co-leads the Securities Investigations + Enforcement Practice Group at Troutman Pepper. She focuses her practice on government and securities regulatory investigations, financial services litigation, commercial litigation, and corporate compliance. Drawing on her experience in government service and private practice, Ghillaine regularly represents corporations and individuals in investigations conducted by the Securities & Exchange Commission, the Department of Justice, the Financial Industry Regulatory Authority, and other government and regulatory agencies. Ghillaine has successfully defended several high profile SEC investigations and enforcement proceedings involving a wide range of significant issues, including insider trading, accounting fraud, market manipulation, and broker-dealer sales practice violations. Prior to entering private practice, Ghillaine was a Branch Chief and Staff Attorney in the New York Regional Office of the Securities & Exchange Commission’s Division of Enforcement, where she investigated and litigated a wide range of securities enforcement matters.

Photo of Carlin McCrory Carlin McCrory

A seasoned regulatory and compliance attorney, Carlin brings extensive experience representing financial institutions, fintechs, lenders, payment processors, neobanks, virtual currency companies, and mortgage servicers.

Photo of Addison Morgan Addison Morgan

Addison is an associate in the firm’s nationally recognized Consumer Financial Services Practice Group. He has represented several of the nation’s preeminent financial institutions in litigation arising under the Fair Credit Reporting Act (FCRA), the Telephone Consumer Protection Act (TCPA), the Fair Debt…

Addison is an associate in the firm’s nationally recognized Consumer Financial Services Practice Group. He has represented several of the nation’s preeminent financial institutions in litigation arising under the Fair Credit Reporting Act (FCRA), the Telephone Consumer Protection Act (TCPA), the Fair Debt Collection Practices Act (FDCPA), the FTC Holder Rule, and other consumer protection state analogs.

Photo of Elizabeth Waldbeser Elizabeth Waldbeser

Elizabeth is an associate in the firm’s Business Litigation Practice Group. She represents clients in a diverse array of litigation matters in federal and state courts at the trial and appellate levels.