Binance sues SEC.

Binance, Binance.US, and Changpeng “CZ” Zhao have issued their initial responses to the SEC’s lawsuit against them. At first glance, the stakes appear to be high. However, by the end of the day, we may have a better idea of how the case is progressing and what a judge thinks about the arguments presented so far.

On a related note, I am in D.C. today reporting on the SEC v. Binance hearing on a temporary restraining order. Unfortunately, it is only for today. But if anyone is in the D.C. District Court after the hearing, please feel free to say hello.

You are reading State of Crypto, a blockchain newsletter that examines the intersection of cryptocurrency and government. Click here to sign up for future editions.

Early arguments

The narrative

Binance.US and Binance filed their first responses to the U.S. Securities and Exchange Commission (SEC) on Monday, arguing that the regulator’s push for a temporary restraining order would prevent them from paying employees, vendors, or anyone else. The filings also provided a preview of their defense against the SEC’s actual charges.

• Regulating crypto without exempting traditional finance is challenging, as shown in House Bill.
• SEC’s DeFi rulemaking do-over falls short.
• Prof. Alexander doubts SEC’s success against Binance.

Why it matters

Last week, the SEC made some pretty serious allegations against Binance. Today, those allegations will be put to their first test in court.

Breaking it down

Binance.US filed a dramatic response to the SEC’s restraining order motion, stating that it could end the business if granted. The filing stated, “The SEC seeks unnecessary and unjustified relief. Far from requesting relief that is ‘carefully calibrated’ to ‘maintain[] the status quo’ … the SEC’s proposed remedies would effectively end BAM’s business,” calling the proposed temporary restraining order “draconian.”

District Judge Amy Berman Jackson of the D.C. District Court ordered Binance and Binance.US to describe any differences in their proposed stipulations by 1:00 p.m. ET (17:00 UTC), an hour before the hearing is set to begin.

She also ordered the SEC to describe what changes it wants from the Binance.US proposal that would make it acceptable to the agency “in lieu of the proposed” temporary restraining order.

“No additional argument or explication may be submitted by any party at this time,” the judge ordered.

At the risk of reading too much into the tea leaves, this minute order also suggests how the judge might approach at least the initial issues in the lawsuit. The order suggests that Judge Jackson may not want to sign off on a full temporary restraining order but is willing to enact some sort of restriction on who can access Binance.US’s funds.

There are no real differences between the Binance.US and Binance proposed stipulations, mostly things like capitalization, though the Binance filing also specifies root access to Amazon Web Services instances as part of the software that may be involved.

The SEC’s filing calls for any restrictions to also cover staking services and AWS access.

Stories you may have missed

• Mt. Gox’s Hackers Are 2 Russian Nationals, U.S. DOJ Alleges in Indictment: The U.S. Department of Justice identified two Mt. Gox hackers for the first time after unsealing a 2019 indictment.
• U.S. SEC Out-of-Bounds in Dragging DeFi Into Proposed Exchange Rule, Industry Says: The SEC’s deadline for proposed rulemaking is today. Early comments from industry suggest it’s less than thrilled with the idea that decentralized finance may be dragged into SEC regulations on trading platforms.
• New Stablecoin Bill Drafted by House Republicans as Compromise With Democrats: Ahead of today’s House Financial Services Committee’s stablecoin hearing, lawmakers published a new compromise bill on the issue.
• CFTC Wins Lawsuit Against Ooki DAO: Ooki DAO officially lost its case against the Commodity Futures Trading Commission after never showing up in court. The CFTC won a fine and an injunction against Ooki DAO, which geofenced the U.S. last year after the suit was first filed.
• EU’s Landmark Crypto Law MiCA Published in Official Journal: The European Union’s Markets in Crypto Assets (MiCA) legislation will start taking effect by next June after the bill was published in the Official Journal of the European Union.

Hinman’s emails

Ripple, which is also facing an SEC lawsuit, published emails from officials deliberating the text of former SEC Director of Corporation Finance William Hinman’s famous 2018 speech in which he said Ether was not a security, probably.

I previously wrote about the emails themselves in this article and my colleague, Shaurya Malwa, discussed the immediate price reaction in this article.

One thing that stands out is how much thought went into the emails. We are also given a rare glimpse into the decision-making process – SEC officials debated the clarity of the language used and made suggestions about the Howey analysis.

What I found most interesting is that an early version of the speech did not mention ether (ETH) at all. The draft from May 25, 2018 only referred to bitcoin (BTC) and focused mainly on how tokens might transition from securities to non-securities in theory.

This week:

Tuesday:

• 13:30 UTC (2:30 p.m. BST) – The U.K. Parliament held its third reading of the Financial Services and Markets Bill.
• 14:00 UTC (10:00 a.m. ET) – Treasury Secretary Janet Yellen testified before the House Financial Services Committee.
• 18:00 UTC (2:00 p.m. ET) – A federal court heard arguments in the SEC’s effort to secure a temporary restraining order against Binance.US, freezing its assets.
• 18:00 UTC (2:00 p.m. ET) – The House Financial Services Committee held a hearing on stablecoins.

Wednesday:

• 18:00 UTC (2:00 p.m. ET) – The Federal Reserve announced its latest interest rate decision.

Thursday:

• 12:15 UTC (2:15 p.m. CEST) – The European Central Bank announced its latest interest rate decision.
• 14:30 UTC (10:30 a.m. ET) – There was an oral argument in the ongoing U.S. vs. Sam Bankman-Fried case.
• 14:30 UTC (10:30 a.m. ET) – There was a creditor meeting in Bittrex’s bankruptcy case.
• 15:00 UTC (11:00 a.m. ET) – There was a hearing in Genesis’s bankruptcy case.

Elsewhere:

• (The Wall Street Journal) The Journal explored North Korea’s efforts to steal crypto to fund its nuclear weapons program.

If you have any thoughts or questions about what I should cover next week or any feedback you’d like to share, feel free to email me at [email protected] or find me on Twitter @nikhileshde. You can also join the group conversation on Telegram.

See you all next week!