Second Circuit Reverses Dismissal of Securities Lawsuit Against Crypto Exchange Binance
On Friday, March 8, 2024, the United States Court of Appeals for the Second Circuit issued a ruling in a case involving Binance, the world’s largest cryptocurrency exchange, and its alleged violations of federal and state securities laws.
The case was brought by a group of investors who used Binance’s online platform between 2017-2018 to purchase various crypto tokens that they claimed were securities. The plaintiffs argued that by selling these tokens on its exchange without registering them, Binance violated Section 12(a)(1) of the Securities Act of 1933. They sought damages and the recision of contracts under this law and Section 29(b) of the Securities Exchange Act of 1934.
The plaintiffs initially filed their lawsuit in April 2020. They named Binance and its CEO Changpeng Zhao as defendants. In March 2022, the district court dismissed all of the plaintiffs’ claims, finding that applying U.S. securities laws would constitute an impermissible extraterritorial reach under the Supreme Court’s Morrison ruling. The district court also said the plaintiffs’ federal claims were untimely based on the statutes of limitations.
The plaintiffs appealed the district court’s dismissal to the Second Circuit. In its ruling, the three-judge panel reversed the lower court’s decision. Regarding extraterritoriality, the Second Circuit said the plaintiffs plausibly alleged their transactions on Binance were “domestic” based on two factors. First, they claimed the crypto token trades were “matched” on servers located in the U.S., including some hosted by Amazon Web Services. While Binance says it has no physical headquarters, the court said it’s reasonable at the pleading stage to consider server locations.
As a second factor, the court pointed to the plaintiffs entering into Binance’s terms of use and placing trade orders while located in the U.S. Once orders were placed, Binance’s terms gave it the right to reject cancellations. So the plaintiffs were obligated from within the U.S., showing irrevocable liability attached domestically.
On the timeliness of federal claims, the Second Circuit disagreed that violations occurred prior to plaintiffs’ actual purchases. It said the plaintiffs’ claims under Section 12(a)(1) and 29(b) could not accrue until after transactions were made. Therefore, the appeals court reinstated claims relating to purchases within one year of the initial April 2020 complaint filing.
The Second Circuit’s decision is a setback for Binance, which has tried to position itself as decentralized and beyond any nation’s authority. Going forward, the case will return to the district court for further proceedings consistent with addressing the transactions as domestic. The ruling could ultimately open Binance up to greater liability if tokens are found to be securities under U.S. law.
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