The year is 2017. Bitfinex is trying to recover almost 120,000 bitcoin stolen in a hack and giving customers a 33% haircut; BitMEX is pushing 100X leverage on all its customers. Through the fog, a glimmering beacon of hope appears for shitcoin retail traders: Binance.
The freshly minted exchange soon became the go-to bazaar for new traders and veterans alike. Volume ballooned and fortunes were made within the casino that claimed to have no headquarters.
In September, Binance created and issued its own token, BNB, on the Ethereum blockchain. The token promised discounts on trading fees, a specific burn rate, and — without using so many words — a return on investment.
Binance thrived. Meanwhile, other hacks occurred, other exchanges found themselves in the crosshairs of regulators, and influencers got sued for undisclosed promotions. But BNB shot up in value, from $1 to over $600 in 2021.
Before the SEC, BNB was suspected to be a security
Long before BNB peaked repeatedly in 2021 (and certainly before the Securities and Exchange Commission (SEC) charged Binance with securities violations on Monday) many were questioning whether the token was an unregistered security.
In 2018, Laura Shin interviewed the chief exec of Binance, Changpeng Zhao (CZ). It was an historic moment for me — the first time I saw BNB clearly for what it was. I urge everyone to listen to the entire discussion, but this is a transcript of the moment it hit me:
Laura Shin: Well that’s kind of interesting to me what you said about how you want to have BNB to be used to pay for other things because typically, at least so far in the crypto space, the tokens that have been used for money are decentralized — like Bitcoin, Ether, Zcash, Monero — and here you’re creating this sort of company coin that you want other vendors to use and for people, in general, to use as money. Is that the vision there?
CZ: No, essentially not a company coin. So, the Binance coin itself lives on the blockchain — right now it lives on the Ethereum blockchain. Very soon we will have our own blockchain which is also a decentralized platform — so in that regard we’re the same as all the coins you just mentioned. And it’s not a coin by the company, it’s still a community.
We are the issuers. We have issued it. And people have bought it and it’s been spread out. And we do hold quite a large number of it, but we’re not going to be able to issue anymore, so we no longer have a lot of control on the coin. What we could control is, basically, as we are still the very large shareholders of the coin we’re financially incentivized to make the coin worth more. And we’re incentivized to work really hard to add more utility, to add more use cases. The more use cases the coin has, the more utility value it will have, and then hence the price. So we’re very encouraged to do that.
Laura Shin: See, it’s statements like that that make me think, “Oh, that sounds like a security to me. It’s like XRP.”
BNB satisfies the Howey Test
For those unfamiliar with the Howey Test, it’s used in the US to determine if a transaction is an investment contract, and therefore subject to securities laws. Let’s run through the criteria for a security and see if CZ’s interview with Shin checked any of the boxes.
- Investment of money: CZ specifically states that “people have bought [BNB] and it’s been spread out,” meaning that many people have bought the coin issued by Binance.
- Common enterprise: CZ directly established a connection with the token’s use cases and utility, adding value to the coin for investors.
- Reasonable expectation of profits derived from the efforts of others: CZ quite literally discusses the Binance team being incentivized to drive the value of the coin up.
A single interview with the CEO of Binance in 2018 dismantled any real argument anyone could level against the simple suggestion that BNB is an unregistered security.
Could the SEC have acted sooner?
On Twitter, the SEC brilliantly chose to meme one of the most potent pieces of evidence provided in its lawsuit against Binance: a quote from its chief compliance officer, “We are operating as a fking unlicensed securities exchange in the USA bro.”
It’s worth noting that the quote is from 2018, raising the question: how long has the SEC been investigating Binance and could they have acted sooner?
Ultimately, court documents and time will provide an answer (if a settlement isn’t reached), but in the meantime there are dozens of cryptocurrency exchange tokens with almost identical parameters to BNB that are now squarely in the crosshairs of the SEC.
So, when the SEC files a complaint against the next major exchange, let’s not pretend it’s an inter-governmental conspiracy to choke the cryptocurrency industry. Let’s have the decency to admit people were clumsy and reckless while breaking the law — and got caught.