SEC Ties Terraform Ruling to Binance in Securities Violations and Deceptive Practice Case

The US Securities and Exchange Commission (SEC) filed a motion on January 3, 2023, in the US District Court for the District of Columbia. This filing highlighted parallels between its case against Terraform Labs, its co-founder Do Kwon, and its enforcement action against Binance, Binance.US, and Changpeng Zhao, Binance’s former CEO.

The SEC’s filing drew attention to a December 28 ruling against Terraform Labs and Do Kwon by Judge Jed Rakoff. In this ruling, Judge Rakoff sided with the SEC, determining that specific tokens involved in the alleged Terraform fraud were securities. This was based on the fact that they are investment contracts and the offers and sales of UST constituted an investment contract​​​​​​.

The SEC emphasized the relevance of Judge Rakoff’s analysis of Terraform’s ‘stablecoin’ UST to its case against Binance’s ‘stablecoin’ BUSD, and Binance’s staking-as-a-service, BNB Vault, and Simple Earn programs. This connection was highlighted in the January 3 filing, suggesting that the Terraform Labs judgment could provide “further grounds” for Judge Amy Jackson to consider denying a motion to dismiss from Binance​​​​.

The charges against Binance and Zhao include operating unregistered exchanges, broker-dealers, and clearing agencies; misrepresenting trading controls and oversight on the Binance.US platform; and the unregistered offer and sale of securities. The SEC alleges that while Zhao and Binance claimed that US customers were restricted from transacting on Binance.com, in reality, high-value US customers continued trading on the platform. Furthermore, Binance.US was purportedly independent but was allegedly secretly controlled by Zhao and Binance​​​​​​​​.

SEC Chair Gary Gensler accused Zhao and Binance of engaging in an “extensive web of deception,” involving conflicts of interest, lack of disclosure, and evasion of the law. The SEC’s complaint alleges that since at least July 2017, Binance.com and Binance.US, under Zhao’s control, operated as exchanges, brokers, dealers, and clearing agencies, generating at least $11.6 billion in revenue from US customers​​.

The SEC also charged Binance for the unregistered offers and sales of BNB, BUSD, and crypto-lending products, as well as BAM Trading with the unregistered offer and sale of Binance.US’ staking-as-a-service program. The complaint noted that Binance secretly controls assets staked by US customers in BAM’s staking program​​.

The Terraform Labs and Binance cases are part of a series of SEC enforcement actions in 2023 alleging platforms offered unregistered securities. These actions also involve lawsuits against Coinbase, Ripple, Kraken, and others, indicating a broader regulatory focus on the cryptocurrency sector​​.

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