A federal judge dismissed a lawsuit against cryptocurrency exchange Binance on the grounds that US securities laws do not apply to a non-domestic exchange and the lawsuit did not fall within the statute of limitations under the US securities laws.
On March 31, 2022, a federal judge in the US District Court for the Southern District of New York (SDNY), in Anderson et al. v Binance et al. ( (S.D.N.Y. Mar. 31, 2022)), dismissed a lawsuit against cryptocurrency exchange Binance on the grounds that US securities laws do not apply to a non-domestic exchange and the lawsuit did not fall within the statute of limitations under the US securities laws. The action was brought by investors who bought certain digital tokens on the exchange.
Digital tokens can either be considered:
Utility tokens, which permit the holder of the token to participate in projects associated with the token.
Security tokens, which are classified as securities under federal and state law. Issuers of security tokens must file registration statements with the SEC and a platform that trades security tokens must register with the SEC as a securities exchange.
The investors alleged that beginning in July 2017, Binance promoted, offered, and sold various security tokens in the US without indicating to investors that the tokens were securities. The investors claimed that they became aware that the tokens were considered securities in April 2019 when the SEC issued a framework categorizing tokens as securities (see Practice Note, SEC Regulation of Digital Assets: SEC April 2019 Framework for Analyzing Offer and Sale of Digital Assets).
The investors alleged that Binance violated the Securities Act of 1933 (Securities Act), the Securities Exchange Act of 1934, as amended (Exchange Act), and state Blue Sky protections by failing to register as an exchange or a broker-dealer and failing to file a registration statement for the securities it sold. Investors claimed that due to these failures, they were not afforded the protections of the US securities laws and were not made aware of the risks of their investments.
The claims were dismissed because:
The US securities laws do not apply extraterritorially.
The claims brought under Section 12(a)(1) of the Securities Act must be brought "within one year after the violation on which it is based" and were therefore barred by this statute of limitations.
The claims brought under Section 29(b) of the Exchange Act, which must be brought one year after the discovery that the sale or purchase involves a violation, were barred by the statute of limitations.
The SDNY ruled that domestic securities laws did not apply since Binance is not a domestic exchange, even though it uses servers and computers located in the US. Additionally, the SDNY ruled the claims were time barred since:
Seven of the nine tokens at issue were last purchased in 2018, more than a year before the action was brought.
The latest act of solicitation with respect to the remaining two tokens occurred in November 2018 and February 2019, more than a year before the action.
The one-year statute of limitations from the time of the discovery runs from the time when an individual could have, through the exercise of reasonable diligence, discovered the fraud at issue. Therefore, the SDNY rejected the claim of the investors that the statute of limitations began running when the SEC published the framework characterizing their tokens as securities in April 2019, and that their April 2020 lawsuit was within the year statute of limitations. The SDNY pointed out that, under the discovery rule, the claim accrues when a plaintiff learns of critical facts regarding the injury. Since the framework did not reveal new facts and only provides a nonbinding interpretation, it does not delay the accrual of the Section 29(b) claims.