Legal expert says Tether and Binance Coin (BNB) are likely picks for SEC lawsuit
3 min readAttorney Jeremy Hogan gave his legal assessment of the top five cryptocurrencies naming Tether and Binance Coin as at risk on the “SEC danger rating.”
Hogan has been covering the SEC vs. Ripple lawsuit since proceedings began in December last year. The U.S securities regulator alleges Ripple had sold $1.3 billion of unregistered securities over eight years.
The coverage has demonstrated his knowledge of the complex legal subtleties involved with securities law.
Based on the analysis, Hogan warns that, in his opinion, both Tether and BNB are likely candidates for legal action.
Criteria for SEC enforcement
In determining a breach of securities law, the SEC has relied upon the Howey test to evaluate whether a transaction qualifies as an “investment contract.”
“Under the Howey Test, an investment contract exists if there is an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others,” he said.
The Howey Test refers to SEC vs. W.J. Howey, which the Supreme Court preceded over in 1946. The Howey company had sold zones of citrus groves to buyers in Florida, who then leased back the land to Howey.
Howey staff tended to the groves and sold the fruit on behalf of the owners, with both parties taking a share in the revenue generated by the operation.
Howey did not register the transactions with the SEC, and the Supreme Court’s final ruling determined that the leaseback deal qualified as an investment contract.
The criteria used to establish an investment contract was:
- An investment of money.
- In a common enterprise.
- The expectation of profit.
- Profit to be derived from the effort of others.
What did Hogan say about Tether and BNB?
Hogan pointed out that his assessment was not a determination of whether the tokens would win or lose in a securities lawsuit. Instead, it relates to the chances of SEC bringing legal action in his opinion.
Hogan touched briefly on Tether’s $18.5 million settlement in February this year with the New York Attorney General (NYAG).
Parent company Bitfinex paid the fine to end the probe into allegations it had tried to cover up an $850 million loss. The NYAG also raised concerns over allegations it had a shortfall of cash reserves backing the Tether in circulation.
Hogan didn’t discuss how Tether stacked up against the Howey test criteria but gave the popular stablecoin a 9/10 danger rating.
In breaking down BNB’s situation, Hogan points out that BNB tokens do form an “investment of money.” He added that the Binance ICO in 2017 also matches the description of an investment contract.
“Is there investment of money? Yes, you buy the coins. And where did the coins come from? Well, Binance had a genuine Initial Coin Offering, an ICO, in 2017. This is the exact thing that Chairman Clayton and new SEC Chairman Gensler have basically said is an investment contract.”
What’s more, Hogan said Binance’s operations are very centralized, citing the firm’s buyback coin burn policy, which keeps coins scarce therefore increasing their value, as fitting the narrative of the expectation of profit.
He gave BNB an SEC danger rating of 8.5/10.
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