Paradigm Files Amicus Brief in SEC's Case Against Binance

September 29, 2023 | Rodrigo Seira

TLDR: Paradigm filed an amicus brief in the SEC lawsuit against Binance. Paradigm was not an investor in Binance and has no direct financial interest in the outcome of the lawsuit. However, we believe it is critical to stand against government overreach regardless of who the defendant is.

Here, the SEC is attempting to leverage the disturbing allegations it levies in its complaint to change the law while circumventing the rulemaking process. The SEC is plainly acting outside the scope of its authority and we oppose this gambit.

The SEC’s lawsuit against Binance is one of three cases the SEC brought against crypto exchanges, through which the agency seeks to lay claim over crypto secondary markets. Chair Gary Gensler himself acknowledged in Congressional testimony that the SEC lacked the authority to regulate these same secondary markets, noting in clear words that “the exchanges trading in these crypto assets do not have a regulatory framework.”

As our brief points out, the SEC’s theory in this case would upend what we know about securities law in several critical ways.

First, it would require this Court to accept the facially incredible argument that an “investment contract” does not require a “contract.” The clear statutory language and case law interpreting it makes clear that an “investment contract” requires contractual undertakings that promise the delivery of future value. A crypto asset sale, particularly one on secondary markets, promises nothing, other than the delivery of the crypto asset. The SEC cannot manifest a formal contract where none exists through clever lawyering.

Second, the SEC’s theory would improperly place all sorts of ordinary asset sales within the reach of the securities laws. Courts have long held that the mere fact that an asset might appreciate in value due to market forces does not mean there is a “reasonable expectation of profits” that makes the sale of the asset an investment contract. Moreover, an asset sale cannot create a common enterprise, a necessary ingredient for an investment contract. A shared hope that an asset will appreciate in value might create a common interest, but that hope does not constitute a common enterprise—especially as there may be no relationship between the asset’s issuer and a secondary purchaser far down the line.

Finally, the SEC’s attempt to regulate crypto assets through its capacious and unreasonable interpretation of “investment contract” must fail under the major questions doctrine. The regulation of crypto assets is of such economic and political significance that the SEC needs “clear congressional authorization” to engage in such regulation. A 77-year-old interpretation (Howey) of a 90-year-old statute (the Securities Act) hardly delivers such clarity.

Regulatory gaps exist in crypto, as the Chair himself has acknowledged in the past—only Congress can and should fill those gaps, not the SEC.