Binance Decision Clarifies Extraterritorial Application Of U.S. Securities Laws To Digital Asset Transactions

• Published date: 20 April 2022
• Subject Matter: Corporate/Commercial Law, Technology, Corporate and Company Law, Securities, Fin Tech
• Law Firm: Frost Brown Todd
• Author: Alan K. MacDonald

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...