Stablecoins Unlikely to Be Subject to the SEC’s Jurisdiction | Insights &

The recent decision in Securities and Exchange Commission v. Binance Holdings Limited et al (Binance)¹ has cast further doubt on the Securities and Exchange Commission’s (SEC’s) pursuit of jurisdiction over stablecoins. On June 28, 2024, the US District Court for the District of Columbia granted the defendants’ motion to dismiss the SEC’s claim that Binance’s stablecoin BUSD was a security, consistent with other court decisions relating to stablecoins.

Of particular interest to the stablecoin industry is the court’s affirmation that stablecoins fully backed with reserves and redeemable on a 1:1 basis with a fiat currency such as the US dollar or the euro (such as Binance’s BUSD or Circle’s USDC) are not in and of themselves “investment contracts” and are thus not subject to the regulatory authority of the SEC.

Furthermore, shortly after this decision, the SEC indicated that it would not recommend an enforcement action against Paxos for its involvement in the issuance of BUSD. These developments are further evidence of what the stablecoin industry has been asserting for years: Sales of fully reserved 1:1 redeemable stablecoins are not investment contracts.

Background

The SEC has brought suit against the digital-asset-trading platform Binance Holdings Ltd.; its founder, Changpeng Zhao; and two related US entities (hereafter, Binance), asserting that Binance (1) offered and sold crypto assets and related programs, including its stablecoin BUSD,²  without a registration statement; (2) operated crypto-currency trading platforms without registering as an exchange, as a broker-dealer or broker, or as a clearing agency; and (3) made false statements to investors and engaged in acts and practices that operated as fraud upon purchasers. The defendants filed a motion to dismiss these claims and asserted various issues relating to the extraterritorial application of the SEC’s jurisdiction.

The court rejected many of the defendants’ arguments but granted the motion to dismiss in part, including vis-à-vis Binance’s stablecoin token BUSD.

The Court Rejected the SEC’s Embodiment Theory

The SEC alleged that Binance’s offering and selling of BUSD stablecoin tokens constituted an investment contract and therefore was a security under the Supreme Court’s test in SEC v. W.J. Howey Co. The three components of the Howey test require: (1) an expectation of profits arising from (2) a common enterprise that (3) depends upon the efforts of others.³ The court disagreed with the SEC and granted Binance’s motion to dismiss vis-à-vis BUSD.

In particular, the court rejected the SEC’s suggestion that BUSD was the embodiment of the alleged investment contract rather than the potential subject of such a contract, endorsing instead a more holistic and contextual analysis:

In the Court’s view, then, the SEC’s suggestion that the token is “the embodiment of the investment contract”… as opposed to the subject of the investment contract, muddied the issues before the Court, ignored the Supreme Court’s directive that the analysis is supposed to be based on the entire set of understandings and expectations surrounding the offering, and unnecessarily invited the defendants’ argument that a decision in the government’s favor here would somehow encroach on the jurisdiction of the Commodities Futures Trading Commission. … Therefore, the Court will endorse and follow the approach taken by the thoughtful judges who boldly wrestled with crypto assets before this case was filed, and it will assess the offerings identified in the complaint individually, resisting the government’s implication that this ruling could go so far as to answer the definitional question that officials in the other branches of government appear to have been assiduously avoiding. In short, no one should read this case as deciding that crypto assets themselves are or are not “securities”; that is not the question presented.⁴  [Citations omitted.]

While the court acknowledged the difficulty in categorizing intangible digital assets, noting that they “do not fit neatly into the rubric set forth in the mere seven pages that comprise the Howey opinion,”⁵ the court also expressed its frustration with the SEC’s inability to articulate how to distinguish between crypto assets from crypto asset securities.

Although the SEC agreed with the court that a “crypto asset … is simply a line of code” and a determination of whether the asset was a security would turn on “the economic realities and the totality of circumstances of how they’re offered and sold”⁶ as Howey requires, the court noted that the “SEC seemed reluctant at that time to clarify fundamental aspects of its position.” ⁷During the initial…