Binance Decision Clarifies Extraterritorial Application Of U.S. Securities Laws To Digital Asset Transactions – Technology & More News Here – Upjobsnews

On March 31, 2022, the United States District Court for the
Southern District of New York dismissed claims brought by U.S.
residents trading on the Binance digital exchange, holding that the
plaintiffs’ purchases of digital tokens were extraterritorial
transactions to which U.S. federal and state securities laws do not
apply.¹ This ruling brings significantly more
clarity to digital asset providers seeking to understand the
parameters of U.S. jurisdiction claims. It also gives more
credibility to the notion that offshore companies can access
U.S.-based computer infrastructure without subjecting themselves to
U.S. jurisdiction.

Binance operates on a decentralized basis, so the location of
its principal place of business for jurisdictional purposes was a
significant factual issue in the litigation. The court addressed
Binance’s location only by noting that its headquarters are in
Malta.²

Beginning in 2017, the plaintiffs, all U.S. residents, purchased
several digital tokens on Binance. The tokens had first been sold
to investors in an initial coin offering and listed concurrently
for secondary trading on Binance. The issuers compensated Binance
for listing their tokens, and Binance received a commission on each
trade.

Plaintiffs alleged that Binance did not make clear to investors
that the tokens they were purchasing on Binance were securities
under U.S. law. Investors claimed they only became apprised of the
tokens’ status as securities on April 3, 2019, when the
SEC’s Strategic Hub for Innovation and Financial Technology
issued a report listing numerous factors to consider in analyzing
whether a digital token would be an “investment contract”
and therefore a security under federal securities
statutes.³

The federal district court granted Binance’s motion for
summary judgment on two grounds – plaintiffs’ purchases were
not domestic transactions subject to U.S. federal and state
securities statutes, and having initiated proceedings too late,
their claims were time-barred.

Plaintiffs’ claims hinged on whether purchases on the
Binance platform were sufficiently connected to the United States
to be subject to its securities laws. In Morrison v.
Nat’l Austl. Bank Ltd., the U.S. Supreme Court held that
federal securities laws apply to those “transactions in
securities listed on domestic exchanges, and domestic transactions
in other securities.”⁴

Under Morrison, an exchange is considered
“domestic” if it must register as a “national
securities exchange.”⁵ Registration is
required if a “facility of [the] exchange [is] within or
subject to the jurisdiction of the United
States.”⁶ Plaintiffs alleged that Binance is
hosted on U.S.-based Amazon Web Services computer servers, and
Ethereum blockchain computers in the United States facilitate
certain transactions on Binance. The court found that using
third-party servers located at sites of the third party’s
choosing was insufficient to deem Binance a national securities
exchange, citing an earlier decision holding that transactions
routed through computer servers in New York did not render RICO
claims domestic in nature.⁷ Nor could the
plaintiffs provide caselaw to support their claim that
Binance’s other alleged U.S. contacts-inclusion of English
language on the Binance website, several employees located in
California, and job postings in the U.S.-are sufficient to
constitute a domestic exchange.

Plaintiffs’ token purchases also did not qualify as domestic
because neither “irrevocable liability” was incurred, nor
title passed within the United States. Plaintiffs bought tokens
while located in the United States, claiming title passed in whole
or in part over servers located in California that host
Binance’s website. Again, the court cited a prior holding that
a trade is not considered domestic when a purchaser “places a
buy order in the United States for the purchase of foreign
securities on a foreign exchange.”⁸

In the absence of legislation addressing the commercial use of
blockchain-based technology in the United States, trading platforms
and other intermediaries that facilitate digital asset transactions
have become understandably wary of conducting business with U.S.
parties. In particular, centralized trading platforms must weigh
the benefits of operating in the world’s largest marketplace
against the risks of exposure to U.S. securities laws, which
continue to be based on a Supreme Court case from an era before
computer technology. The Binance decision
provides greater clarity about the limits of the extraterritorial
application of U.S. securities laws and when a transaction routed
by algorithms through a transnational computer network is
“domestic.”

Footnotes

1. JD Anderson, et al. v. Binance, et al.,
2022 WL 976824 (S.D.N.Y. Mar. 31, 2022).

2. Claims against executive officers of Binance who
are not U.S. residents were also dismissed.

3. Framework for “Investment Contract”
Analysis of Digital Assets,  as modified Apr. 3, 2019 (available here)

4. 561 U.S. 247, 267 (2010).

5. Id. at 266-67.

6. Id.Block

7. Sonterra Capital Master Fund v. Credit Suisse
Grp. AG, 277 F. Supp. 3d 521, 582 (S.D.N.Y. 2017).

8. City of Pontiac Policemen’s &
Firemen’s Ret. Sys. v. UBS AG, 752 F.3d 173,187 (2d Cir.
2014). The court did not address that for purposes of the private
rights of action of a purchaser under federal securities statutes,
Binance was not the seller of the tokens purchased by Plaintiffs;
its facilities were used only to match buy and sell
orders.

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