SEC Suit Against CZ/Binance = Attack on Blockchains and Metaverse/Gaming platforms – Wherefore art thou, NFTs?

There’s a lot to unpack in the SEC’s 136 page Complaint against CZ and Binance, but putting aside for a moment the allegations of fraud and VPN-based circumvention of applicable regulations, a few things stood out to me on a quick review, particularly for those interested in how the SEC believes the definition of a “security” under the Howey test applies to digital assets, like NFTs.  

The Complaint asserts that the BNB token is a security under U.S. law, based on the purchase of 504,000 BNB tokens out of a total of 15 billion, by 32 purchasers in the United States, along with Binance’s use of BNB tokens to pay the salaries of 37 U.S.-based employees. Token issuers organized abroad should take note (as they already should know) that even a relatively few U.S.-based purchasers trigger U.S. regulation as far as the SEC is concerned.  

The Complaint does not quite assert that the “proof of stake” consensus mechanism that powers many blockchains (including Ethereum) is an investment contract under the Howey test, but its description of Binance’s “Staking Program” as a security nonetheless gave me the creeps. The claim does factor in Binance’s alleged marketing of the program as a profit-making opportunity, but one could envision a very similar set of allegations being applied to any proof of stake consensus mechanism which, of course, is one of the best answers the crypto industry has to the notion that it is killing the planet with enormous energy consumption (see proof of work consensus mechanisms generally).  

Finally, while not targeting Eth or the Ethereum network directly, the Complaint labels as securities a variety of native tokens powering popular blockchains and metaverse/Web3 gaming platforms, including SOL (Solana’s native token), ADA (Cardano’s native token), Matic (Polygon’s native token), Algo (Algorand’s native token), Sand (Sandbox metaverse native token), Mana (Decentraland metaverse native token), Axs (Axie Infinity gaming platform native token), and others. 

Granted, this SEC action is grounded in what, if true, appear to be difficult to overcome admissions by Binance execs (e.g., “[w]e are operating as a fking unlicensed securities exchange in the USA bro”), and the Section 5 violations are based on fungible tokens, as opposed to NFTs, but the breadth of the application of the Howey test in this action, and the reasoning that can be gleaned from the allegations, is worth noting, particularly for everyone waiting to see how the SEC intends to apply these rules in the NFT context.  

The SEC charged Binance for the unregistered offers and sales of BNB, BUSD, and crypto-lending products known as “Simple Earn” and “BNB Vault.” Further, the SEC charged BAM Trading with the unregistered offer and sale of Binance.US’ staking-as-a-service program. The complaint also notes that Binance secretly has control over assets staked by U.S. customers in BAM’s staking program.

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