On the Margin Newsletter: Unpacking the ‘big win’ in SEC v Binance

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Welcome to the On the Margin Newsletter, brought to you by Ben Strack and Casey Wagner. Here’s what you’ll find in today’s edition:

Binance notched a small win in its suit with the SEC last week. Here’s what else the opinion said.
Why the US ether ETF launches will come after Independence Day.
We are days away from a big holiday weekend, but the economic calendar is still packed.

Binance’s little win

Like Coinbase did in March, Binance notched a small win in its legal battle with the SEC Friday.

You may remember the securities regulator sued both Coinbase and Binance in June 2023. Legal teams from each exchange tried to get the cases tossed, but neither effort was terribly successful.

In an opinion published late Friday evening, DC District Court Judge Amy Berman Jackson allowed the SEC’s case against Binance to mostly continue.

Jackson opted to fully dismiss count two: the SEC’s claim that Binance sold its BUSD stablecoin as an investment contract. Counts one and three — alleging that Binance offered and sold BNB, Simple Earn and BNB Vault as unregistered securities — are also partially dismissed.

The remaining 10 counts will proceed, Jackson ruled.

You are welcome to read the full 89-page opinion for yourself, but here is the CliffsNotes version:

The SEC’s allegations relating to BUSD “do not align with the prongs of the Howey test,” the court ruled.

In its initial complaint against Binance, the SEC claimed BUSD buyers had reasonable expectations of profits from the token (a key principle of the Howey test). But Judge Jackson disagreed, stating the SEC failed to demonstrate a clear link between the token’s value and the success of the platform as a whole.

“As for the ‘common enterprise’ element, the most the SEC can say is ‘the proceeds from investor purchases of BUSD were purportedly pooled in reserves, and Binance earned [50%] of the investment returns on those pooled assets,’” Jackson wrote.

But BUSD holders were never under the impression there was any profit sharing, the court added, so the charge was dismissed.

Binance’s defense that there can’t be an investment contract without a real contract doesn’t hold up, the court said.

Binance’s legal team argued in January that without a physical contract, an investment contract cannot exist. Judge Jackson was having none of this back then, and her opinion apparently remains the same.

“The notion that a contractual relationship is required has been consistently rejected by other district courts faced with [cryptocurrency] cases in recent years,” Jackson wrote.

Court precedent, Jackson said, states that investment contracts can be an implicit understanding rather than a formal agreement.

Secondary BNB sales are not investment contracts, the court said.

If you saw any headlines or X posts hailing this opinion as a “big win” for crypto, they were probably talking about the court’s ruling on secondary sales.

Judge Jackson ruled the SEC did not sufficiently prove that secondary BNB sales were investment contracts.

The ruling is not at all a loss for crypto; but it’s also not a major win. Jackson was obviously careful with her language.

“The SEC is not alleging or asking the court to find that the thing in question — the BNB token — is a security,” Jackson wrote. “Its allegation is that during the ICO and after, it was offered as, or sold as, a security.”

Jackson is letting the other claims about tokens listed in the SEC’s original complaint stand for now, so we’ll see if her opinion changes down the line. Because of Jackson’s skepticism about the SEC’s general approach to classification, perhaps the industry isn’t celebrating prematurely after all.

— Casey Wagner

$61 million

The total outflows from ETH investment products last week, according to data from CoinShares.

It marks the largest weekly capital exit from ETH funds since August 2022, a Monday CoinShares report notes.

Roughly the same asset amount ($58 million) left such products the week prior. The latest money exiting these funds has pushed net outflows for ETH investment vehicles negative year-to-date, making it the worst-performing asset on the net flows front.

The price of ETH was down 7% from a month ago, as of Monday afternoon. The asset is still up about 53% since the start of the year.

Patience is a virtue

The US spot ether ETF proposals will need at least a few more days to bake, sources say.

They’ll be ready to serve up to investors soon, though. We know you’ve been hearing that for several weeks now, but it remains true.

A person close to the filings confirmed to Blockworks Monday that the SEC has suggested some more S-1 revisions. The original report came after a source told me issuers could get a launch date from the SEC “at any point” given the “light” last round of registration statement edits.

Issuers are set to address the latest SEC comments and resubmit to the regulator by July 8 — squashing hopes of pre-Independence Day approval.

The source called the suggested fixes (that they know of) “tiny and immaterial.” A second person familiar with the process added that the latest comments are “reasonable.”

The SEC may have intentionally slowed down the process during the holiday week, the first source guessed. Or, they added, the regulator may be looking to keep issuers “on the same pace” if one has more substantial amendments to make.

The regulator is likely to allow all the ETH funds to launch at the same time.

There’s one more detail we learned. The SEC is not requiring an S-1 with every final detail filled in (i.e. management fee) on July 8. This means there will be at least one more flurry of registration statements after that date.

In other words, if the SEC is happy with the July 8 documents, it could quickly turn around and request a last round of filings before giving issuers the coveted “effective” date.

A spokesperson for the regulator declined to comment.

All is to say, it’s possible for the ether ETFs to launch sometime next week. Or it could drag on a bit longer.

— Ben Strack

On Our Radar

Happy Monday! We have an abbreviated holiday week with markets closing early on Wednesday, shut down Thursday and back open Friday. Hopefully you’re one of the lucky ones with an extra long weekend. Either way, here’s what we’re watching this week:

Fed Chair Jerome Powell is scheduled to speak Tuesday morning at the European Central Bank (ECB) Forum on Central Banking in Portugal. We’ll be listening for his comments about last week’s PCE print, the labor market and, of course, how both impact plans for rate cuts.
Initial jobless claims come out Wednesday. First-time unemployment filings dropped 6,000 to a seasonally adjusted 233,000 for the week ended June 22 — though that was during a holiday week, which tends to boost volatility. Hopefully we see the trend continue as a sign the labor market is as strong as the Fed would like.
We’ll also get the minutes from the FOMC’s last meeting on Wednesday. We already have the projections for June, but the minutes will give us even more insight into how individual members are thinking about the rate cut schedule. Markets will be closed by the time the minutes drop.

— Casey Wagner

Bulletin Board

The IRS late Friday released its final regulations for crypto brokers. So-called “custodial brokers” — those who “take possession of the digital assets being sold by their customers” — must report all sales and exchanges of digital assets. See the updated 1099 form here.
After VanEck filed for a Solana ETF last week, SOL’s cumulative volume delta (which measures net buying and selling) hit $29 million, according to a report from crypto research firm Kaiko. The filing’s impact on SOL is still minimal compared to how 19b-4 approval of the impending ETH ETFs impacted ether, but it’s an area to keep your eye on nonetheless.
The US Marshals Service will be using Coinbase Prime to custody and trade forfeited digital assets, the exchange announced Monday. A new government business agreement in the midst of a massive legal battle with the SEC is always a fun development.

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