On Tuesday, a U.S. federal judge refused to grant the Securities and Exchange Commission’s request for a temporary restraining order freezing the assets of Binance.US.
Judge Amy Berman Jackson of the D.C. District Court told the SEC and Binance’s lawyers to negotiate terms for the exchange’s operations and report back to the court within two days.
Jackson said “there’s absolutely no need” for a restraining order should the two sides agree on limits restricting Binance.US’s operations in the United States, adding that they “aren’t that far apart.”
The exchange has suggested it could transfer all U.S. customer assets to new wallets under the sole control of Binance.US executives.
Jackson referred both parties to a magistrate judge to work on reaching a compromise, reserving final judgment on the restraining order until an agreement is reached or negotiations fail.
An agreement between the parties would nullify the SEC’s request to freeze Binance.US’s assets.
Judge Jackson said a compromise would pose the best possible outcome for the broader web3 industry. “Shutting [Binance.US] down completely would create significant consequences not only for the company but for the digital asset markets in general,” Jackson said.
Jennifer Farer, an SEC lawyer, said the regulator is “open to the business continuing to operate.”
The SEC sued Binance and Binance.US on June 5 for allegedly violating federal securities laws, following a three-year investigation, and requested the asset freeze two days later. The SEC also filed similar charges against Coinbase on June 7.
Judge Slams SEC
While the lawsuits pose a threat to the future of the exchanges’ U.S.-based operations, they also provide an opportunity for the courts to scrutinize the regulatory agenda of the SEC concerning web3.
Industry stakeholders, lawmakers, and other regulatory institutions have criticized the SEC for pursuing an aggressive campaign of ‘regulation by enforcement’ while failing to provide clear guidelines to the industry.
During Tuesday’s hearing, Judge Jackson described the SEC’s enforcement actions as an “inefficient and cumbersome” strategy for regulating crypto. Jackson also asked the SEC’s attorneys to distinguish what distinguishes a “crypto asset” from a “crypto asset security.”
“The [crypto assets] you’re not calling securities, what are they?” Jackson said.
SEC attorney Matthew Scarlato said the agency had already discussed several crypto assets it believes comprise securities in its complaint against Binance. Scarlato added that the SEC reserved the right to investigate the other tokens listed on the exchanges in the future.
After being pressed by Jackson to classify Binance’s BNB Coin, SEC attorney Matthew Martens said the token is “a crypto asset.”
Capital Flight Risk
In its lawsuit against Binance.US, SEC attorneys raised concerns that Binance’s global platform or CEO, Changpeng Zhao, may control the private keys needed to move Binance.US’s $2.2B in digital assets overseas.
Farer said Binance.US gave multiple conflicting accounts of how its assets are custodied, backpedaling after initially claiming it had an agreement with the global Binance platform.
However, Judge Jackson slammed the SEC for failing to demonstrate that Binance.US’s customer assets were leaving the United States.
“I want to know if it’s happening or not,” Jackson said. “It’s stunning that I’ve asked each of you this.”
Binance.US and Zhao submitted a joint memorandum denying the SEC’s claim that customer funds were mishandled on Monday, asserting the SEC was “unable to identify a single instance” of customer assets being misused.
Binance.US representatives said a total assets freeze would spell a “death penalty” for the company. In other court filings submitted Monday, the exchange said it would “quickly grind to a halt” without funds to sustain its operations.