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Binance and its founder Changpeng Zhao pushed back on the U.S. Securities and Exchange Commissions argument surrounding investment contracts in the agencys lawsuit against them.

Binance said in a filing on Tuesday that the SECs complaint focuses on transactions by customers who clicked on a website, bought tokens from other anonymous token owners, and then logged off.

In none of the transactions at issue did a contract exist with a promoter to invest money into a common business enterprise, the exchange added.

Binance argued that the SEC ignored the requirement that the existence of an investment contract must be determined on a transaction-by-transaction basis.

BAM Trading and BAM Management, the entities that operated Binance.US, also said Tuesday in a filing that the SEC has not adequately alleged that the digital asset transactions on BAMs platform constitute investment contracts.

[Even] if there is ambiguity about how to apply the term investment contract to digital assets, such a major question should be addressed by Congress and not by a court, a separation of powers proven necessary by the SECs own history of territorial aggrandizement, the companies said.

The two filings come as Binance continues to try to dismiss the lawsuit the SEC filed in June. The SEC sued Binance and its founder Changpeng Zhao over alleged violations of the countrys securities laws, alleging the crypto exchange lied to customers and misdirected funds to a separate investment fund owned by Zhao.

Last week, the SEC filed a notice to inform the court that Binance and Zhao pleaded guilty to criminal violations involving anti-money laundering requirements.

This Court may take judicial notice of facts contained in Zhaos and Binances plea agreements and the Consent Order, and consider them in deciding the Joint Motion, the SEC added.

Disclaimer: The Block is an independent media outlet that delivers news, research, and data. As of November 2023, Foresight Ventures is a majority investor of The Block. Foresight Ventures invests in other companies in the crypto space. Crypto exchange Bitget is an anchor LP for Foresight Ventures. The Block continues to operate independently to deliver objective, impactful, and timely information about the crypto industry. Here are our current financial disclosures.

2023 The Block. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

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Binance pushes for clarity on investment contract claims in attempt to dismiss SEC suit - The Block - Crypto News

Despite its settlement with the US Department of Justice, Binances legal team continues to fight the US Securities and Exchanges case against the crypto exchange.

In a filing from late Tuesday, lawyers representing the exchange argued that the SEC made misleading claims.

They also called the SECs prior filing which asserted that the DOJs plea deals with Binance and former CEO Changpeng Zhao proved the two deliberately tried to subvert US law procedurally improper and impermissible.

In November, the DOJ announced a $4.3 billion settlement with Binance that also ousted Zhao from his role as CEO. Both Zhao and Binance entered plea deals, pleading guilty to violating the Bank Secrecy Act.

Read more: Here are the details of Binance and Changpeng Zhaos plea deal

The SEC, in its early December filing, claimed that the plea deals undermine Zhaos and Binances arguments that the SECs claims relating to the Binance.com Platform involve non-actionable extraterritorial conduct.

Binance filed a motion to dismiss the SECs lawsuit in September, arguing that the Commission didnt plausibly allege securities violations and that it was overstepping its regulatory reach.

But the use of the plea deals, the lawyers argue, is not enough to excuse the SEC from fair notice. Basically, Binance is arguing that the SEC never gave it a heads up that the crypto assets it claims are securities, or that fair notice was provided under the Securities and Exchange Acts.

The history of regulation by other agencies only underscores the lack of notice of any relevant regulatory authority on the part of the SEC, Binance argued.

The SECs effort to benefit from other agencies resolutions under a different statutory regime is another example of its refusal to accept Congresss decision to assign authority over the kinds of assets at issue here to other agencies.

Additionally, the claims that the SEC made about Merit Peak the market maker owned by Zhao settled billions in US-based transactions are not entirely accurate, since the allegations were made initially by FinCEN and were neither admitted nor denied by either Binance or Zhao.

Binances lawyers added that the exchange admitted to using a US-technology service provider to store data, host the website and operate the platform, but failed to add that the provider did all of this on servers in Japan. The SEC only claimed that the provider was US-based.

A plea agreement that supports jurisdiction for a charge of failing to maintain an adequate anti-money-laundering program under the BSA says nothing about registration obligations under federal securities law, nor does it say anything about any role in the alleged conduct of securities transactions or listing of assets alleged to be securities, Binance said.

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Binance says the SEC can't use DOJ plea deals as proof of guilt - Blockworks

Matt Stankiewicz, Partner at The Volkov Law Group, finishes his series on Binance by providing key takeaways for AML compliance programs.

Binances $4.3 billion fine is one of the largest penalties the DOJ has ever obtained from a corporate defendant. Furthermore, its founder and CEO Changpeng Zhao (CZ) was also personally subject to a fine, amounting to $150 million. And to top it all off, CZ still faces up to 18 months of jail time as prosecutors pursue the maximum sentence. This should be a clear wake up call to the cryptocurrency industry that compliance is mandatory. Too many foreign exchanges wrongly believed (or, more likely, willfully ignored) that they could bury their heads in the sand and serve U.S. customers without worrying about U.S. laws and regulations.

At a high level, exchanges are considered money services businesses (MSBs), so theyre required to register with FinCEN and comply with the Bank Secrecy Act (BSA). The BSA requires filing suspicious activity reports (SARs) and implementing an anti-money laundering (AML) compliance program that is reasonably designed to prevent the [MSB] from being used to facilitate money laundering and the financing of terrorist activities.

Now that Binance and CZ have shown the industry what not to do, the resulting fallout from these actions will typically provide a great resource for others to learn from these mistakes. By digging into the allegations, we can identify plenty of lessons to be learned. Further, the compliance obligations of the settlement agreement will also be a great resource as to regulators expectations for what cryptocurrency exchanges must have in terms of its compliance program.

It all starts at the top, and compliance is no different. Even DOJs compliance obligations for Binance begin with a clear requirement for a high-level commitment to compliance. Looking back at Binances misconduct, the exchanges issues clearly revolved around a complete lack of a high-level support for its compliance commitments. At various times, Binances legal and compliance staff raised concerns and recommended improvements and controls, which were ultimately ignored or suppressed by senior leadership. By selecting a new CEO with a strong commitment to and experience in compliance, supported with directors and senior management with explicit and visible support for compliance, will help Binance begin its reformation.

DOJ required Binance to develop a policies, procedures, and controls that address the following:

This may help serve as a checklist of areas your respective programs also need to address.

For those that were unaware, it is clear now that cryptocurrency exchanges are considered MSBs and, as such, must implement an AML compliance program. Binance clearly knew that, but believed that a program would hinder its growth and profitability. This is typically misguidedreputation matters. We see that more than ever now, following the collapse of some crypto titans that threw the industry into a tailspin (FTX, Celsius, Terra, BlockFi, etc., etc.). Customers are looking for reliable and trustworthy exchanges in order to avoid the disastrous impacts of these compliance failures. Customers also dont want to be associate with hackers, cybercriminals, and other unsavory characters.

We also stress to our clients that compliance does not need to negatively impact the customer experience. In fact, proper compliance controls can sometimes even enhance the experience. We discovered this in working with one client who relied on manual spreadsheets for a complex KYC onboarding process, which many potential customers abandoned before ever completing. We were able to help that client streamline its onboarding process with automated tools to obtain the basic information needed to verify customer identity, which got those customers onboarded and using the exchange quickly, smoothly, and ultimately decreased the abandonment rate. Furthermore, these streamlined KYC processes were them buttressed with a robust transaction monitoring system that could then identify issues in real-time and escalate these users to compliance for more robust monitoring or enhanced due diligence as needed.

In some ways, cryptocurrency provides certain advantages that traditional finance does not have. This is especially true with transaction monitoring. The unique nature of the underlying blockchainultimately, a public ledgerprovides for incredible transparency of the flow of funds. Since the ledger is public, anyone can view it and trace funds as it moves between wallets. It is technically possible to trace the entire transaction history of every single Bitcoin ever created. Further, several tools have been created to quickly and easily review the ledger and identify links to any potential compliance issues. These tools can identify whether funds were recently washed through a mixer, are coming from a known darknet market, are linked to cybercriminals or sanctioned entities, or otherwise represent some sort of risk to the business. These powerful tools are an incredibly powerful addition to any cryptocurrency compliance program.

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Lessons Learned from Binances Criminal Settlement (III of III) - JD Supra

Matt Stankiewicz, Partner at The Volkov Law Group, continues his series of posts breaking down Binances recent criminal settlement.

Binances settlement with the DOJ represents one of the largest criminal corporate enforcement actions ever. A review of the facts reveals that the penalty is likely warranted, as the misconduct was driven from the very top. Binances founder and CEO, Changpeng Zhao (CZ) was involved in all of it.

Taking the DOJs factual allegations as true, it appears that Binances strategy was simply avoid its compliance obligations and focus on growth and profit at all costs. And despite its decision to avoid compliance U.S. regulations, Binance actively sought U.S. customers. The company even specifically tracked its U.S. user base as early as August 2017, just a month after it began operating. Many of these users were enterprise users considered as VIPs, as they transacted the most significant volumes and provided the needed liquidity for the exchange to operate at the highest level. This deep liquidity provided Binance with a significant advantage over its nearest competitors.

Binance required virtually no KYC throughout the majority of its operation. The exchange maintained a Level 1 tier for new users that required only an email address to set up, with no other identifying information needed. At this initial level, users could withdraw up to the value of two Bitcoin per day. At its peak, this allowed users to withdraw nearly $180,000 per day. Furthermore, if that limit was still not enough, users could simply create additional accounts with new email addresses to receive the same limit immediately. This effectively allowed unlimited withdrawals.

The lack of KYC also allowed sanctioned entities to transact on Binance unabated. The company became aware of these issues and compliance staff did attempt to make recommendations to remedy the situation. However, they were consistently met with resistance or inaction. On one occasion, after noting some significant gaps allowing sanctioned users to use the exchange, an executive wrote back suggesting that they should pay more attention is to give user better service and user experience, not further ban some users.

The exchange further lacked any transaction monitoring, as required by the Bank Secrecy Act (BSA). Internal compliance staff constantly joked about the lack of controls, with the DOJ providing quotes where one compliance staff noted to another that we need a banner is washing drug money too hard these days come to binance we got cake for you. Indeed, Binance frequently processed transactions related to ransomware, hacks, darknet markets, criminal activity, and mixing services. Indeed, even in our own cryptocurrency investigations in recent times, we have frequently found that the funds we are tracing are typically routed, at least in part, to Binance at some point.

Throughout its operation, Binance continued to track its U.S.-customer base and took affirmative steps to continue serve U.S. customers. It wasnt until June 2019, following recommendations from consultants, did the company even begin to discuss its compliance with basic BSA/AML regulations. At that point, between 20-30% of Binances revenue came from the United States. Despite acknowledging that the company needed to consider either blocking U.S. users or implement KYC controls, CZ authorized strategies that ultimately circumvented these regulations.

Shortly after that discussion, the company set up Binance.US as its dedicated U.S. platform and redirected a contingent of its U.S. userbase to this new exchange, which did maintain various KYC and AML controls. This was more window-dressing than it was actual compliance, however. Ultimately, the company continued to maintain its most valuable U.S. customers on its main exchange, in a clear, willful disregard for U.S. regulations.

CZ himself apparently helped establish a strategy titled U.S. Exchange and Main Exchange Compliance parameters. These parameters were designed to allow certain U.S. users to continue operating on the main exchange, which did not require KYC, by utilizing an API. At this point, CZ was also advised that Binance needed to comply with U.S. money transmitter laws and that the company would certainly be categorized as a money services business (MSB). Binance.US applied and received necessary licenses, though the foreign exchange still continued to service its high-value U.S. customers through the main exchange which lacked these same licenses. These high-value U.S. customers accounted for nearly a quarter of Binances global revenue.

In order to maintain these high-value customers, CZ authorized strategies to help these users circumvent the main exchanges basic controls. This would allow Binance to bury its head in the sand and feign ignorance of the violations. The dedicated VIP customer support would basically obtusely hint to these users what the issues weresuch as noting that a users U.S. based IP address was the sole reason they could not access the platform, hoping that they would get the hint to utilize a VPN. Binance support even sometimes provided specific help to circumvent its own controls. For example, Binance developed a script, approved by CZ, that customer support could use that explain that Binances internal review mis-categorized certain users as U.S.-based and that Binance would help them re-categorize themselves. Binance would then provide information on how to establish offshore entities that the exchange could then use for its lax KYC purposes and allow the users to continue operating on the main exchange.

The company still continued to track its U.S. user base and related revenues in its internal reporting, though referred to the U.S. as UNKWN in these reports. CZ was apparently aware ofand approvedall of this non-compliance and related strategies. Binance realized more than $1.6 billion in profit from its U.S. users between August 2017 and October 2022.

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Binance Intentionally Avoided Compliance with U.S. Laws Under CEO Changpeng Zhao (II of III) - JD Supra

Binance submitted two key filings on Dec. 12 in an ongoing case previously launched by the U.S. Securities and Exchange Commission (SEC).

Binances first filing moves to dismiss the case that the SEC launched against its companies and its former CEO Changpeng Zhao in June.

The filing asserts that the SEC has not plausibly alleged that various Binance tokens and services are securities or investment contracts.

It also asserts that the SECs specific claims around Binances BNB token are time-barred, meaning that offerings of the asset occurred outside of the U.S. or the SECs charges are untimely. Furthermore, the filing alleges that claims around certain Binance.com transactions, including BNB Vault and Simple Earn, aim to apply securities law outside of the U.S. in a non-permissible way.

Binances filing additionally asserts that the SECs failure to provide fair notice about its securities claims compels the dismissal of the lawsuit.

Finally, the filing asserts that complaints against Zhao should be dismissed due to lack of personal jurisdiction. According to defense lawyers, Zhaos role in controlling Binance is not solely sufficient for jurisdiction, and the SEC has failed to allege that Zhao had contact with U.S. users in a way that is relevant to the case.

Binance and Zhao arranged plea deals with the Department of Justice (DOJ) and several other U.S. government agencies during the week of Nov. 20. Though those plea deals are separate from the ongoing SEC case, the securities regulator asked courts to consider both plea deals on Dec. 8.

Binance contested this in another filing on Dec. 12, which reads:

In addition to being procedurally improper and impermissible, the SEC Notice fails to demonstrate the relevance of the resolutions with the Department of Justice and FinCEN to any of the SECs defective claims against [Binance Holdings Limited] and Mr. Zhao.

Binances filing added that the SEC had not amended its complaint, asserting that the agencys judicial notice is not an alternative to the amendment.

Numerous other objections are also detailed in the text. According to the filing, plea deals from Binance and Zhao only show that the involved parties violated the Bank Secrecy Act but do not demonstrate that Binance and Zhao received fair notice from the SEC regarding two other securities and exchange acts.

The filing also maintained a lack of jurisdiction defenses that apply to Binances companies and Zhao himself. Specifically, it said that no admission in the plea agreements indicates that relevant transactions occurred, or irrevocable liability attached, in the United States. Regarding Zhao, the filing said that personal jurisdiction has a different meaning in criminal and civil cases implying that jurisdiction exists in the DOJ case, not the SEC case.

Binance concluded by stating that the SECs notice should be disregarded. It once again pressed for the case to be dismissed entirely.

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Binance says that DOJ settlement lacks relevance in SEC case as it moves for dismissal - CryptoSlate