SEC v. Binance Court Filing, retrieved on June 5, 2023 is part of HackerNoon’s Legal PDF Series. You can jump to any part in this filing here. This is part 42 of 69.
FACTS
VII. BINANCE AND BAM TRADING ENGAGED IN UNREGISTERED OFFERS AND SALES OF SECURITIES.
D. BAM Trading Offered and Sold Its Staking Program as a Security.
339. In or around February 2020, BAM Trading began offering its Staking Program to Binance.US Platform investors, marketing the program to the public as a way to earn “passive income” through the efforts of Binance. While, in theory, any individual can seek profit through their own staking efforts, BAM Trading promotes its Staking Program as a superior and much easier way to obtain staking rewards by, among other things, pooling the crypto assets of a large number of investors.
340. BAM Trading’s Staking Program capitalizes on the reward structure of the “Proof of Stake” consensus mechanism used by some blockchains to reach agreement about which transactions are valid, to update the blockchain accordingly, and to reward participants with additional crypto assets. A blockchain using the Proof of Stake consensus mechanism selects a “validator” from a pool of node operators who have agreed to certain requirements necessary to maintain the blockchain and construct new blocks.
341. To be considered for selection into the pool, a potential validator must commit, or “stake,” a set amount of the blockchain’s native asset. These staked assets are held as collateral in the protocol to incentivize validators to perform required functions. A “correction penalty” is deducted, or “slashed,” from the staked assets of validators who underperform. Conversely, validators earn rewards in the form of additional amounts of the native asset by timely voting on proposed blocks, proposing new blocks, and participating in related consensus activities.
342. To create a new block, the protocol chooses a validator from among those that have staked. The more one stakes, the more likely one is to be selected as a validator and receive the maximum staking reward. The most successful staking operations maximize the chances of being selected by staking a large number of assets and minimizing server downtime.
343. Individuals can stake assets on their own, but this requires considerable technical knowhow. Accordingly, BAM Trading markets its Staking Program as a way for investors to rely on and profit from BAM Trading’s technical expertise and knowhow, industry relationships, and infrastructure to reap the benefits of staking as a passive investment opportunity. BAM Trading also touts the advantages its staking programs offer over staking independently. These advantages include instant reward accrual, shorter holding periods, low (or no) upfront deposits or staking minimums, compensation for slashing penalties, regularly scheduled payouts at certain rates, and an easy-to-use interface that requires “just a few clicks” to reap passive income.
344. As BAM Trading explains on its website:
Independent cryptocurrency staking can be a daunting process for most individuals. In addition to meeting hardware requirements that may vary from asset to asset, users may also need to install and run their own nodes. That’s where Binance.US Staking comes in. With a user-friendly interface and industry-leading uptime across nodes, Staking is the destination of choice for customers looking to earn rewards on their assets.
345. BAM Trading publishes on its website the list of staking-eligible crypto assets (which has changed over time) and the annualized percentage yield (or reward rate) offered to investors with respect to each asset. The web-based interface and mobile app for the Binance.US Platform also allows users to designate the tokens that they want to stake in the program.
346. The Staking Program’s terms have evolved over time, but BAM Trading’s marketing has consistently focused on the competitive yield it offers, touting a wide range of assets that users can earn profits by staking. Users are also told that the stated APY is purportedly calculated based on factors such as “Network conditions,” “Staking configuration,” and “Supply and demand.” BAM Trading’s “Terms of Use” further state that the quoted APY “is an estimate only and not guaranteed,” and is determined (and may change) in BAM’s “sole and absolute discretion.” BAM Trading also states that it will deduct a commission from the returns that BAM Trading earns on staking, before paying investors. BAM Trading determines how and when investors’ tokens will be staked, and how and when rewards, if any, will be distributed. 3
47. BAM Trading also markets its Staking Program as a way to avoid minimum staking requirements imposed under certain blockchain protocols and to maintain liquidity. For example, BAM Trading notes that individual investors who wish to independently stake on the Ethereum 2.0 Proof of Stake consensus would need a minimum of 32 ETH (nearly $60,000 at recent values) and agree to long lock-up periods in order to become a validator. But by pooling investor assets to launch Binance-controlled validators, BAM Trading allows investors to participate with a minimum of just 0.0001 ETH (less than $2).
348. BAM Trading has engaged in the unregistered offer and sale of its Staking Program as an investment contract, and thus, as a security.
349. Participation in BAM Trading’s Staking Program requires the investment of money in the form of crypto assets. Investors risk loss if BAM Trading fails to perform as a validator, is assessed slashing penalties for which it cannot make investors whole, or if assets are otherwise lost if BAM Trading fails to detect or manage hacking and other risks as it is executing its staking strategy, over which BAM Trading retains absolute discretion. Investors also face risk of loss if the staked crypto assets significantly decrease in market value while staked because BAM Trading will not allow users to sell or withdraw crypto assets while they are staked.
350. For each staking-eligible crypto asset that is a part of the Staking Program, BAM Trading, directly or through affiliates or other third parties, pools investor assets in a common “staking pool” in which investors “combine their staking power and share the rewards proportionally to their contributions to the pool.” Moreover, for as long as the investors choose to stake their tokens, investors receive payouts from BAM Trading that are distributed to them pro rata. In addition, the larger the pool of assets for staking for each particular staking-eligible crypto asset, the higher the likelihood of obtaining rewards, which inures to the benefit of all investors in that particular asset, as well as BAM Trading, such as, for example, in the form of fees from the Staking Program. BAM Trading does not segregate or separately manage any crypto assets that ostensibly belong to any particular investor’s account as part of the Staking Program. Instead, all assets of the same type tendered into the Staking Program are pooled together.
351. Finally, as alleged above, BAM Trading has consistently promoted its Staking Program in a way that fuels reasonable expectations of profits from BAM Trading’s efforts. BAM Trading marketed its program as an investment to “earn” payouts or “yield” and claimed it would work to provide immediate, reliable, and predictable profitability on that investment. Investors in the Staking Program rely on BAM Trading’s pooling of the invested tokens and efforts in successfully validating transaction blocks on the relevant blockchains.
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This court case 1:23-cv-01599 retrieved on September 6, 2023, from is part of the public domain. The court-created documents are works of the federal government, and under copyright law, are automatically placed in the public domain and may be shared without legal restriction.
