A Leader in Cryptocurrency Exchange, Binance is a cryptocurrency exchange where users can buy, sell, and trade crypto in the US. Binance is distinguished from other prominent trading platforms such as Coinbase in that it offers global crypto exchange services and offers trading, institutional benefits, and digital storage to more than just US users. Recently, a federal judge based out of the U.S. District Court for the Southern District of New York ruled that domestic law does not apply to Binance given it is not a domestic exchange in the U.S. and it was filed after the statute of limitations (the law that sets the maximum amount of time that parties involved have to initiate legal proceedings).

This case was brought by a group of investors who argued they invested in a myriad of tokens (i.e., EOS, QSP, KNC, TRX, FUN, ICX, OMG, LEND, ELF), which had lost much of their value over time. Specifically, the plaintiffs sought compensation for the price they had paid for the tokens as well as any other associated costs Binance had charged upon the purchase. They continued in stating that “Binance and the Issuers wrongfully engaged in millions of transactions, including the solicitation, offer, and sale of securities, and without Binance registering with the SEC as an exchange or broker-dealer. As a result, investors were not informed of the significant risks inherent in these investments, as federal and state securities laws require.”

With respect to this argument, the court stated that Binance is not subject to domestic securities laws since it is not headquartered in the U.S., but rather in the Cayman Islands. Notwithstanding that Binance uses U.S.-based Amazon to host its infrastructure, Binance is still not a domestic exchange. The fact that the investors had purchased such tokens while located in the U.S. and on servers located in the U.S. is not sufficient proof for Binance to constitute a domestic exchange. As a result, the court held that Binance is not subjected to domestic securities laws.

In addition, the case addressed another issue in that the plaintiffs had purchased most of the tokens in 2018 yet filed the complaint two years later in 2020. Thus, the one-year statute of limitations had run out and the complaint was not timely. As a result, the case was dismissed on procedural grounds and was not heard on the merits. It will be interesting to watch if the court defaults to such procedural bars, like the statute of limitations, in deciding future class-action lawsuits against crypto exchanges. Particularly in the wake of the Binance decision and given the ambiguity surrounding digital assets and the lack of a stable legal framework governing them, it is possible courts may dismiss cases solely on the grounds of procedural bars.

In fact, this case follows the class action lawsuit against Coinbase where the plaintiff investors alleged that Coinbase was operating as an unregistered securities exchange. In the Coinbase decision, the SEC stated Bitcoin and Ethereum are not securities though it also revealed the need for greater regulatory clarity, particularly since each cyrpotasset or transaction must be analyzed on its own. In fact, the 255-page complaint argues individually for each token in showing that it qualifies as a security under the Howey test.

 At the very least, investors should be aware of the risks inherent to crypto purchases and the procedural bars that would prevent the case from being heard on the merits. It will be interesting to watch if the SEC provides further guidance with respect to token issuers and crypto transactions. Currently, the regulatory ambiguity allows subjectivity to creep into the analysis and the question of whether a token is a security will remain open to interpretation and a bespoke analysis.

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Lee v. Binance Docket: https://www.courtlistener.com/docket/17043306/1/lee-v-binance/.