Second Circuit Court of Appeals Reverses Dismissal in Binance Lawsuit, Reviving Securities Allegations

A recent decision by the Second Circuit Court of Appeals has overturned a lower court dismissal and reinstated a lawsuit against Binance, the world’s largest cryptocurrency exchange, its former CEO Changpeng Zhao, and other executives. The lawsuit, initiated in April 2020 by a group of crypto investors, accuses the defendants of selling securities to the plaintiffs through the exchange, including various ERC-20 tokens such as EOS, TRX, ELF, FUN, ICX, OMG, and QSP.

Appellate Court Reverses Lower Court Decision, Reviving Case

The case faced a setback when Judge Andrew Carter of the Southern District dismissed it in May 2022, citing two main reasons: first, that the plaintiffs had filed the lawsuit past the statute of limitations deadline, and second, that Binance, being a non-domestic exchange, did not have sufficient ties to the U.S. to fall under federal securities laws.

However, with the recent ruling by the Second Circuit Court of Appeals, the case has been revived. The appellate court found merit in the plaintiffs’ argument that transactions involving the assets in question were finalized on servers within the U.S., and that they had accessed Binance from the U.S.

Addressing Jurisdictional and Statute of Limitations Concerns

Additionally, the court challenged Binance’s assertions regarding its lack of headquarters or physical location. Addressing the statute of limitations issue, the circuit court ruled that the clock did not start until the plaintiffs purchased the tokens, which occurred within a year of them filing the suit. It’s worth noting that while the original complaint involved more tokens, only seven were implicated in the recent ruling.

Significance of the Ruling and Next Steps

The implications of this ruling are significant in providing clarity regarding the jurisdiction of U.S. federal securities laws over secondary market trading of digital assets claimed to be securities. Drew Hinkes, a partner at K&L Gates, stressed the importance of this ruling in offering clarity on the matter. It is crucial to emphasize that the ruling does not confirm nor refute whether the tokens in question are securities.

Assuming the case continues without further appeal and returns to the district court, the parties will have an opportunity to argue over whether the tokens meet the legal definition of securities. In response to the ruling, plaintiffs’ attorney Jordan Goldstein, a partner at Selendy Gay, expressed satisfaction with the decision and readiness to pursue the class action against Binance and its founder Changpeng Zhao.

The recent decision by the Second Circuit Court of Appeals has revived the lawsuit against Binance, allowing it to continue in the district court. The ruling tackles essential issues concerning the applicability of U.S. federal securities laws to transactions involving digital assets and sets the stage for further legal proceedings to determine the classification of the tokens central to the case.