Binance takes a new step in its legal battle against the U.S. Securities and Exchange Commission (SEC) by filing a Joint Notice of Supplemental Authority. The filing makes use of Coinbase’s recent partial victory over the SEC to argue flaws in the agency’s regulatory approach to cryptocurrencies. 

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The Context: SEC vs. Crypto

Over the past few years, the SEC has been actively targeting cryptocurrency platforms, alleging that many operate as unregistered exchanges, brokers, or clearing agencies. Binance, one of the largest global crypto exchanges, faces similar accusations. However, Binance has been pushing back, arguing that the SEC’s enforcement actions lack clear legal and regulatory foundations.

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Coinbase's Partial Victory: A Game-Changer?

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Coinbase’s recent court victory against the SEC is pivotal to Binance’s defense. In this case, the U.S. Court of Appeals for the Third Circuit ruled that the SEC failed to adequately explain its denial of Coinbase’s 2022 petition for clearer cryptocurrency rules. Coinbase had requested regulatory clarity, arguing that the lack of defined rules created legal uncertainty for the crypto market. For instance, Coinbase clarified what exactly constitutes a security when it comes to digital assets like cryptocurrency. The SEC then stated that the majority of cryptocurrencies, aside from Bitcoin, were securities.

Judge Stephanos Bibas criticized the SEC for relying on outdated securities laws while neglecting blatant instances of fraud in the cryptocurrency industry (e.g. FTX). The court held that the “SEC’s order was conclusory and insufficiently reasoned”, allowing Coinbase to demand a more complete explanation from the SEC. 

This decision, while not a complete win, forces the SEC to reconsider its approach and opens the door for crypto companies to challenge regulatory actions. Emboldened by this recent win, Binance also took a stance. 

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Binance's Legal Strategy

In a recent filing, Binance draws parallels to Coinbase's partial win against the SEC. Binance argues that the SEC’s approach to enforcing securities laws on crypto platforms is inconsistent and flawed. Specifically, Binance highlights that the SEC has not provided clear guidance on how existing securities laws apply to digital assets, leading to uncertainty and legal challenges for the industry.

Binance’s filing also points out that the SEC’s failure to issue a deficiency notice against Coinbase—a formal document outlining regulatory violations—indicates inconsistent enforcement. Binance contends that without clear regulatory guidelines, the SEC cannot effectively prosecute crypto platforms, including them.

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Howey Test and Its Role in Crypto Regulation

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At the core of these disputes is the Howey Test, a legal framework used to determine whether an asset qualifies as a security. The Howey Test is a legal standard established by the U.S. Supreme Court in 1946 to determine whether a transaction qualifies as an investment contract under U.S. securities laws. If a transaction meets the criteria of an investment contract, it is considered a security and falls under the regulatory oversight of the SEC.

To qualify as a security under the Howey Test, a transaction must meet the following four criteria:

1. Investment of Money
   There must be a financial investment from participants.
2. In a Common Enterprise
   The success of the investment is linked to the collective efforts of a group or business.
3. Expectation of Profit
   Investors must have a reasonable expectation of earning profits from their investment.
4. Efforts of Others
   The profits must result primarily from the efforts of a third party, such as a promoter or company.

Binance and Coinbase both challenge the SEC’s application of this test to cryptocurrencies, arguing that digital assets do not fit neatly within its criteria. According to critics, the SEC’s reliance on this decades-old test shows the need for updated laws tailored to modern financial technologies.

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Ripple's Case: Another Key Influence

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The broader crypto legal landscape also includes Ripple’s ongoing case with the SEC. Ripple, the company behind the XRP token, has argued that XRP is not a security. A significant ruling in July 2023 determined that XRP’s public sales on exchanges did not constitute securities transactions, marking a win for Ripple. However, the SEC has appealed this decision, keeping the case in limbo.

These legal battles collectively highlight the inconsistencies in how U.S. courts and regulators treat cryptocurrencies. Many players in the crypto space call for more uniformity and for regulators to release clearer guidelines. 

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What Binance Hopes to Achieve

Banking on Coinbase’s partial victory, Binance aims to strengthen its case and potentially have some of the charges against it dismissed. Binance’s argument is straightforward: the SEC cannot enforce rules that are unclear or inconsistently applied. If successful, Binance’s strategy could set a precedent for other crypto companies facing similar challenges.

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The Broader Implications for Crypto Regulation

The outcomes of these legal cases could reshape the regulatory landscape for cryptocurrencies in the U.S. If courts continue to side with crypto companies, it may pressure the SEC to adopt clearer and more industry-friendly guidelines. This shift could encourage innovation while providing the regulatory clarity that crypto businesses need to operate confidently. Moreover, leadership changes at the SEC, such as the anticipated departure of Chair Gary Gensler and the potential appointment of the more crypto-friendly Paul Atkins, could shift the agency’s stance into a more crypto-friendly one.

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A Turning Point for Crypto?

Binance’s recent filing, bolstered by Coinbase’s partial court victory, represents a key moment for the cryptocurrency industry. It shows that crypto platforms aren’t afraid to fight back and urges regulators to provide clearer guidelines. As a new Trump-led presidency approaches, Web3 users eagerly await whether or not the new SEC will be able to balance innovation with investor protection. 

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