SECURITIES AND EXCHANGE COMMISSION v. BINANCE HOLDINGS LIMITED et al Document 169: Amicus Brief

District Of Columbia District Court
Case No. 1:23-cv-01599-ABJ-ZMF
Filed October 31, 2023

AMICUS BRIEF by CHAMBER OF DIGITAL COMMERCE. (znmw)

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Page 1 IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff,
Civil Action No. 1:23-cv-01599 (ABJ-ZMF)
v.
BINANCE HOLDINGS LIMITED, BAM TRADING
SERVICES INC., BAM MANAGEMENT US
HOLDINGS, INC., AND CHANGPENG ZHAO,
Defendants.
BRIEF OFAMICUS CURIAE CHAMBER OF DIGITAL COMMERCE
IN SUPPORT OF DEFENDANTS’ MOTION TO DISMISS
Steven F. Gatti*
Weisiyu Jiang
CLIFFORD CHANCE US LLP
2001 K Street NW
Washington, District of Columbia (202) 912-Steven.Gatti@cliffordchance.com
Weisiyu.Jiang@cliffordchance.com
Jesse Overall*
CLIFFORD CHANCE US LLP
31 West 52nd Street
New York, New York (212) 878-Jesse.Overall@cliffordchance.com
*pro hac vice to be filed
*pro hac vice to be filed
Attorneys for Amicus Curiae
The Chamber of Digital Commerce
Page 2 TABLE OF CONTENTS
Table of Authorities ....................................................................................................................... iii
Interest of the Amicus Curiae ......................................................................................................... Introduction and Summary of Argument ........................................................................................ Argument ........................................................................................................................
I.
The Regulation-by-Enforcement Approach Stifles Innovation and Drives
Market Participants Offshore ..................................................................................
II.
An Asset that is a Subject of an Investment Contract is not Itself an
Investment Contract, so a Venue where that Asset is Traded is not a
Securities Exchange ..............................................................................................
III.
A.
Courts Consistently Distinguish Between the Subject of an
Investment Contract and the Overall Arrangement ..................................
B.
Recent Court Decisions Generally hold that Tokens are not
Investment Contract Securities .................................................................
C.
Transactions in Tokens that are not Securities do not Trigger
Exchange Act Registration Requirements ................................................
The SEC’s Regulation-By-Enforcement Regime Raises Separation of
Powers And Due Process Concerns ......................................................................
Conclusion ........................................................................................................................

ii
Page 3 TABLE OF AUTHORITIES
Page(s)
Cases
Biden v. Nebraska,
143 S. Ct. 2355 (2023) .................................................................................................. 16, 17, West Virginia v. EPA,
142 S. Ct. 2587 (2022) ........................................................................................................ 16, Alabama Association of Realtors v. HHS
141 S. Ct. 2485 (2021) .............................................................................................................. FDA v. Brown & Williamson Tobacco Corp.,
529 U.S. 120 (2000) ............................................................................................................ 16, S.E.C. v. W.J. Howey Co.,
328 U.S. 293 (1946) ........................................................................................................ 4, 10, United States v. Leonard,
529 F.3d 83 (2d Cir. 2008)........................................................................................................ Bailey v. J.W.K. Prop., Inc.,
904 F.2d 918 (4th Cir. 1990) .............................................................................................. 10, Gary Plastic Packaging Corp. v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,
756 F.2d 230 (2d Cir. 1985).......................................................................................... 11, 15, SEC v. Aqua-Sonic Prods. Corp.,
687 F.2d 577 (2d Cir. 1982)...................................................................................................... Miller v. Cent. Chinchilla Grp., Inc.,
494 F.2d 414 (8th Cir. 1974) .................................................................................................... SEC v. Glen-Arden Commodities,
493 F.2d 1027 (2d Cir. 1974).............................................................................................. 10, SEC v. Ripple Labs, Inc.,
et al., No. 20 Civ. 10832 (AT), 2023 WL 4507900 (S.D.N.Y. July 13, 2023) .................. 12, SEC v. Terraform Labs Pte. Ltd.,
2023 WL 4858299 (S.D.N.Y. July 31, 2023) ........................................................................... SEC v. Telegram Grp. Inc.,
448 F.Supp.3d 352 (S.D.N.Y. 2020)................................................................................... 14, Other Authorities
Cryptocurrency Regulations Wanted: Iterative, Flexible, and Pro-Competitive Preferred,
61 Boston College L. Rev. 1149 (2020) ..................................................................................... The Financial Innovation and Technology for the 21st Century Act (FIT21),
H.R.4763, 118th Cong. (2023) ................................................................................................. Responsible Financial Innovation Act (RFIA),
S. 2281, 118th Cong. (2023) ..................................................................................................... Digital Commodities Consumer Protection Act of 2022 (DCCPA),
S. 4760,117th Cong. (2022) ......................................................................................................
iii
Page 4 INTEREST OF THE AMICUS CURIAEFounded in 2014, the Chamber of Digital Commerce (“The Chamber”) is the world’s
largest digital asset and blockchain trade association. The Chamber represents more than diverse members of the blockchain industry globally, including digital asset exchanges, leading
banks and investment firms, startups, and other digital asset economy participants. Guided by
the principle of promoting industry compliance with applicable law, The Chamber seeks to foster
a legal and regulatory environment in which digital asset users can enjoy regulatory certainty as
they apply blockchain technologies to an array of commercial, technological, and social
purposes. An important aspect of that mission is representing the interests of its members,
including regularly filing briefs as amicus curiae in novel cases that implicate issues of
importance to the blockchain community.Pursuant to its mission, The Chamber also sponsors several compliance-focused initiatives,
in addition to advocating for regulatory clarity. These include the Blockchain Alliance, which
since 2015 has combatted criminal uses of blockchain technology, providing technical assistance
and information-sharing resources. This initiative serves over 100 governmental and commercial
entities, including the Securities and Exchange Commission (the “SEC” or the “Commission”).

Defendants consented to this brief’s filing; the SEC declined to take a position but reserved the
right to object upon review of the brief. No counsel for any party authored any part of this
brief. No party, counsel, or person other than amicus, its members, or its counsel financed the
brief’s filing or preparation. BAM Trading Services Inc., (“BAM Trading”) and BAM
Management US Holdings Inc., are members of The Chamber, but neither entity nor its
personnel participated in any way in the drafting of this brief.

The Chamber has filed amicus briefs in other cases involving similar issues of law. For
example, The Chamber recently filed an amicus brief in Securities and Exchange Commission
v. Coinbase, Inc., et al., and Coinbase Global, Inc., which involves some issues similar to the
present litigation. See Brief of Amicus Curiae, The Chamber of Digital Commerce, SEC v.
Coinbase Inc. et al., Case No. 1:23-cv-04738-KPF, Dkt. No. 55 (S.D.N.Y. filed Aug. 11,
2023).
1
Page 5 The Chamber also encourages industry compliance with federal securities law through initiatives
like the Token Alliance, a network of 400+ thought leaders and technologists that has developed
numerous tools and resources for industry and policymakers as they engage with the blockchain
and digital asset community.
The Chamber takes no position on the factual merits of any factual assertion made by the
SEC in its Complaint relating to alleged conduct by the Defendants. The Chamber’s interest in
filing this amicus brief is to assist the court in weighing the legal merits of the SEC’s allegations
that certain Defendants are required to register with the agency as national securities exchanges,
broker-dealers, and clearing agencies under the Securities Exchange Act of 1934, as amended
(“Exchange Act”) because they make available for trading certain tokens that the SEC alleges are
“securities” under applicable US securities laws.
INTRODUCTION AND SUMMARY OF ARGUMENT
For decades, the United States has served as the center of the world’s digital economy.
This is the birthplace of early computer hardware companies like IBM, software companies like
Microsoft, digital media companies like Netflix, social media companies like Facebook, as well as
global leaders like Amazon, Apple and Google that offer a wide range of digital products and
services. These companies have benefitted from the legal and regulatory certainty offered by this
country’s laws, courts, and regulators. And U.S. workers and U.S. consumers, in turn, have
benefitted greatly from the efficiencies of the digital economy over the last several decades.
Now, however, one of the newest frontiers of the digital economy—the trillion-dollar
blockchain economy—is conspicuously avoiding the United States, finding the regulatory
environment too opaque and too hostile to conduct business here. Blockchain technology enables
a community of users to record transactions in a highly secure ledger shared within that
2
Page 6 community, without the need for a central authority (such as a government or a bank) to maintain
the ledger’s integrity. Some blockchains are capable of being deployed to solve a very wide range
of computational problems, while others may be used for more targeted purposes, such as hosting
a social media platform, a “metaverse” environment, or a video game. The use cases for this
technology are not restricted to a particular industry, but instead are limited in theory only by
human ingenuity.This promising industry, however, is unfortunately developing primarily offshore, in large
measure because the SEC has adopted a regulation-by-enforcement approach, arbitrarily
categorizing various blockchain-based digital assets as securities and penalizing businesses for
failing to obtain SEC registrations that are not actually available to them. The SEC has not
proposed rules or released formal guidance regarding which digital assets do or do not constitute
securities. But despite this administrative regulatory silence, the SEC’s enforcement message to
blockchain businesses is loud and clear: If your operations in any way touch the United States,
then you risk protracted and costly SEC investigation and litigation. Not surprisingly, unlike

A 2022 US Government Accountability Office (GAO) report illustrated blockchain’s many
commercial use cases. Among others, the GAO Report highlighted non-financial use cases,
such as using blockchain to ensure the reliability of supply chains with numerous suppliers
who do not trust one another, without the use of escrow accounts, multiple contracts, and
verification processes. Blockchain technology might reduce costs in this area by replacing the
escrow provider with an automatically enforced set of rules enabling trustless data sharing over
a computer network. In addition, companies are developing blockchain applications tailored
to industries such as pharmaceuticals and food, to help combat counterfeit medicines, trace
food-borne illnesses, and track food provenance. Potential public sector applications include
maintaining property records, such as title transfer, or improving information sharing in federal
agencies. For financial use cases, the GAO report found that blockchain has the potential to
reduce costs and improve access to the financial system. United States Government
Accountability Office, Report to Congressional Requesters, Technology Assessment,
Blockchain, (March 2022) (the “GAO Report”), p. 10., https://www.gao.gov/assets/gao-22104625.pdf.
3
Page 7 previously emerging segments of the digital economy, blockchain businesses have grown up
largely outside of the United States, to the detriment of U.S. consumers and U.S. workers. The
harm this approach has caused has drawn bipartisan condemnation in Congress.
In the instant action, the SEC has trained its sights on another U.S. digital assets exchange,
BAM Trading and certain affiliated entities, claiming (among other things) that various digital
“tokens”4 available for trading on the exchange constitute “investment contract” securities, and
that BAM Trading and its named affiliates are therefore subject to various registration
requirements under the federal securities laws. But the gravamen of the SEC's Complaint collapses
the long-recognized distinction between the subject of an investment-contract security, which
could be virtually any type of asset, and the “investment contract” itself, which may be a security
subject to U.S. law and regulation.
Courts have long recognized this obvious distinction, in arrangements involving both
digital tokens and many other types of more conventional assets. For example, in the Supreme
Court’s seminal decision in S.E.C. v. W.J. Howey Co., 328 U.S. 293 (1946), the Court held that it
was the offer of an interest in a Florida citrus grove coupled with the right to receive a share of the
grove’s profits that constituted an “investment contract.” But of course, the Court did not hold
that the asset itself—the citrus grove— or its output—fruit—constituted a security.
Despite the SEC’s dogged efforts to collapse the distinction between an investment
contract itself and the underlying subject of that contract, tokens generally available for trading on
exchanges are not a “contract, transaction or scheme” that is the embodiment of a security. The
SEC does not and cannot allege that the tokens traded here grant the holder a right to receive profits

Blockchain networks use programmable digital assets, or “tokens” for a wide variety of
purposes, including to conduct transactions, record changes of ownership, exchange verifiable
data, and achieve coordination across organizations and on the web.
4
Page 8 generated by the token creator or allocator, nor would any reasonable token holder believe that to
be the case. Rather, the token holder buys an ordinary asset through an exchange like BAM
Trading that may have some commercial or consumer use—not unlike oranges—or some
investment or speculative value—again, like many other non-security assets. A bundle of rights,
responsibilities, services and promises promoted by the issuer and creating an expectation of
profits by the investor arising from the issuer’s entrepreneurial or managerial efforts may be an
investment contract, such as an orange grove packaged with a management contract that promises
efforts by the promoter to generate profit for the holder, but the individual component parts alone
generally are not. When courts have addressed the issue (including recently with respect to
tokens), they have generally held that the subject of an investment contract—including tokens—
are not themselves an investment contract or other type of security.
In bringing a case against the Defendants here, the SEC is suing the equivalent of a grocery
store selling oranges and other fruit, or an online ecommerce marketplace, like Amazon. Tokens
alone are not securities, and the markets where they are available to buy and sell are not securities
exchanges. Whether or not a token was initially sold as part of an “investment contract” is of no
consequence. The token alone, when sold on a secondary market between anonymous market
participants in blind bid/ask transactions, is not an investment contact. If it is, then the SEC could
conceivably extend its jurisdiction beyond securities and into a range of markets for products and
assets which may have once served as the subject of an investment contract, such as citrus groves,
oranges, chinchillas, or whiskey, and to the marketplaces and intermediaries through which those
ordinary assets or products are sold or resold.
That cannot be right. This Court has the opportunity here to follow the path of other courts
who have analyzed the applicability of the securities laws to arrangements that embody investment
5
Page 9 securities and maintain the distinction between those relationships, and the subject of those
arrangements, which are not themselves securities.Moreover, given the size of the blockchain economy, the SEC’s attempt to treat tokens
as investment contract securities presents a “major question” under the U.S. Supreme Court’s
Major Questions Doctrine. The SEC should have sought proper authorization from Congress
rather than attempting to capture a bigger piece of the regulatory and enforcement pie via actions
such as this one.
For these reasons, and those set forth below, this Court should grant the Defendants’
Motion to Dismiss.
ARGUMENT
I.
The Regulation-by-Enforcement Approach Stifles Innovation and Drives Market
Participants Offshore
Despite its obvious interest in regulating blockchain businesses, the SEC has refused to
address digital assets via any of its ordinary administrative or regulatory procedures, such as public
notice-and-comment rulemaking or the publication of binding interpretive guidance. Instead, the
SEC has chosen to regulate principally by bringing enforcement actions, leaving market
participants guessing as to which assets the SEC will and will not consider to be securities next.
This unprecedented approach creates avoidable confusion, disruption and harm to the many
individuals and business that are part of the blockchain economy. Indeed, SEC Commissioner
Hester Peirce acknowledged earlier this year that “[u]sing enforcement actions to tell people what

The Chamber takes no position in this brief on whether the tokens alleged to be securities in
the SEC’s Complaint were or were not initially sold pursuant to an investment contract. The
Chamber believes that, under applicable law, this issue has no bearing on whether a platform
facilitating purchases and sales of the subject of such an investment contract has a national
securities exchange, securities broker-dealer, or clearing agency registration obligation under
the Exchange Act.
6
Page 10 the law is in an emerging industry is not an efficient or fair way of regulating.” Commissioner
Hester M. Peirce, Kraken Down: Statement on SEC v Payward Ventures, Inc., et al, Feb. 9, 2023,
https://www.sec.gov/news/statement/peirce-statement-kraken-020923.
This point was echoed by Republican Representative Patrick McHenry at a committee
hearing just a few weeks ago, who cautioned SEC Chair Gary Gensler that “your [agency’s] efforts
to choke off the digital asset ecosystem . . . has created real harm for consumers and our
markets. . . . You said the law is clear, but your actions have created more confusion and lasting
damage.” Patrick McHenry, Chairman, Financial Services Committee, Press Release, McHenry
to SEC Chair Gensler: While Your Time in This Role May be Temporary, the Repercussions of
Your
Actions
May
be
Permanent
for
the
Agency,
Sep.
27,
https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=408984.
2023,
These
concerns with the SEC’s regulation-by-enforcement approach are bipartisan and widely shared.
For example, Democratic House Member Ritchie Torres recently wrote in a letter to Chair Gensler:
“The SEC has chosen to regulate not by clear rule or guidance but by enforcement actions,” urging
the agency to “reassess its regulatory assault on crypto assets.” Rep. Ritchie Torres, Letter to
Chair Gensler, Jul. 18, 2023, https://twitter.com/RepRitchie/status/1681336088873279488.
The Chamber agrees. This Court should resist the SEC’s invitation to apply inapposite
“investment contracts” precedents to the underlying subject of the investment contract, digital
assets, rather than the investment contract itself, as this will stifle innovation and harm consumers
while sending jobs abroad. Indeed, the SEC’s scorched-earth enforcement program against
blockchain businesses—predictably—has already harmed investors. See Michael McSweeney,
Regulatory Uncertainty Keeps Traditional Asset Managers Out of the Crypto Space, Survey Takers
Say, The Block (May 31, 2020), perma.cc/WP9T-4MJ5; Parikshit Mishra & Jamie Crawley,
7
Page 11 Nasdaq Halts Plan for Crypto Custody Service Due to U.S. Regulatory Conditions, CoinDesk (July
19, 2023), perma.cc/H4QR-4RH6; Helen Braun, ADA, SOL Underperform as Robinhood Gets Set
to Delist Them Amid SEC Crackdown, CoinDesk (Jun. 27, 2023), perma.cc/ZGK7-WP2G.
Commentators warn that “the United States is losing innovative startups to other countries with
more established regulatory cryptocurrency schemes.” See Avery Minor, Note, Cryptocurrency
Regulations Wanted: Iterative, Flexible, and Pro-Competitive Preferred, 61 Boston College L.
Rev. 1149, 1151 (2020) (citing examples). Similarly, a report found that merchants often cite a
regulatory environment that undermines trust in digital assets as the basis for refusing them as
payment. See Mengqi Sun, Regulatory Uncertainty Is a Barrier for Wider Bitcoin Adoption, Wall
Street J. (Apr. 6, 2022), perma.cc/9TJ7-7WQJ.
Unlike in prior decades, when the United States was the leader in digital innovation, the
United States is now falling behind other countries in the blockchain space as a result of the
SEC’s power grab. This crusade against digital assets risks causing innovative technologies and
the companies behind them to block U.S. users, depriving U.S. consumers and participants
access to entirely new and emerging technologies that the rest of the world can access. This
would for the first time make America a laggard in the adoption of emerging technologies,
marking a contrast with earlier decades, when U.S. innovation powered the computer revolution
and subsequent internet boom.
Further, even if SEC registration of digital assets and market intermediaries were required,
the current registration frameworks are not compatible with many use cases and commercial
deployments inherent in digital assets. Requiring the creators and allocators of digital assets and
the exchanges upon which they trade to register under the same regulatory framework used for
traditional securities and market participants would undermine the commercial and consumer
8
Page 12 utility of digital assets without a concomitant regulatory benefit. Because securities must be
purchased and sold through intermediaries like broker-dealers or national securities exchanges
registered under the Exchange Act, ordinary transactions involving digital assets that must be
registered as securities would require the use of SEC-registered intermediaries—a service not
currently offered by SEC registrants to The Chamber’s knowledge.
All of this would lead to an absurd result.
Should every company seeking to use
blockchain-based payments really be expected to register with the SEC as a securities exchange,
broker-dealer, or clearing agency, and comply with the voluminous financial regulations that those
traditional financial institutions are subject to? Moreover, by targeting the specific tokens that it
does in the Complaint (which include several digital entertainment and gaming tokens, see Compl.
¶ 352) the SEC is targeting various commercial, consumer and entertainment companies that the
securities laws were not intended to cover as regulated businesses. To put it mildly, there is no
evidence that Congress ever intended to treat digital entertainment companies that build
blockchain-based metaverse apps, computer games, or virtual reality worlds and offer products
that can be used in those apps as regulated securities business and securities transactions. The
SEC nevertheless seeks to treat these businesses and marketplaces where their tokens are sold like
the New York Stock Exchange or Charles Schwab.
The SEC’s “answer” to the industry of “come in to register” is no answer at all. Ultimately,
the securities laws—built around capital formation, investor protection, disclosure and
transparency—are a poor fit for an industry structured around the core values of decentralization
and disintermediation and would make it impossible to conduct ordinary consumer and
commercial pursuits. That means U.S. consumers and companies will lose access to these products
and lose out on market share in this promising and fast-growing sector of the global economy,
9
Page 13 simply due to regulatory uncertainty caused by the SEC’s regulatory overreach. Ultimately, the
SEC’s unchecked enforcement efforts, if ratified by courts, will push industry members offshore
and deprive the United States of the ongoing benefits of an industry that is undoubtedly destined
to grow, with plenty of innovation still to unlock.
II.
An Asset that is a Subject of an Investment Contract is not Itself an Investment
Contract, so a Venue where that Asset is Traded is not a Securities Exchange
The Complaint alleges that certain tokens trading on the Defendants’ platforms are
“investment contracts” and therefore securities. Compl. ¶ 352. This is simply incorrect. While
these tokens may (or may not) be a subject of an investment contract, they themselves are not
investment contracts. In Howey, the Supreme Court found that an investment contract existed
where title to parcels of land acquired by an investor were coupled with a management contract
with a promoter, who contractually agreed to grow citrus trees on the land, harvest the citrus, and
split the profits with the landowners. SEC v. W.J. Howey Co., 328 U.S. 293 (1946). The Court
held that this arrangement constituted a “contract, transaction, or scheme” that was an investment
contract. Id. at 298–99. The Court did not hold, of course, that the land, the citrus trees growing
on the land, or the fruit that was sold from those trees constituted securities in and of themselves.
That is precisely what the SEC asks this Court to do, in a break with precedent and with logic. The
Court should reject the SEC’s expansive definition of “investment contracts.”
A.
Courts Consistently Distinguish Between the Subject of an Investment
Contract and the Overall Arrangement
Courts have found the Howey “investment contract” test satisfied with regard to a variety
of contracts, transactions, or schemes involving unconventional subjects, including: citrus fruit
and citrus groves (Howey, 328 U.S. at 299); films (United States v. Leonard, 529 F.3d 83, 87–(2d Cir. 2008)); cow embryos (Bailey v. J.W.K. Prop., Inc., 904 F.2d 918, 924–25 (4th Cir. 1990);
licenses to sell dental products (SEC v. Aqua-Sonic Prods. Corp., 687 F.2d 577, 582 (2d Cir.
10
Page 14 1982)); whiskey and whiskey casks (SEC v. Glen-Arden Commodities, 493 F.2d 1027, 1034 (2d
Cir. 1974)); chinchillas (Miller v. Cent. Chinchilla Grp., Inc., 494 F.2d 414, 416–18 (8th Cir.
1974)); and bank certificates of deposit (Gary Plastic Packaging Corp. v. Merrill Lynch, Pierce,
Fenner & Smith, Inc., 756 F.2d 230, 240 (2d Cir. 1985)). In none of these cases did the court
determine that the underlying subject of the investment contract was a security or that a
marketplace where the underlying asset or consumer product could be purchased and sold was a
securities broker-dealer or securities exchange. As would otherwise seem obvious, neither has the
SEC asserted nor any court held that a store that buys and sells oranges (Howey), or a liquor store
that sells whiskey (Glen-Arden), or a cattle-breeding program that acquires and sells cow embryos
(J.W.K. Prop., Inc.), needed to register with the SEC in any capacity. To do so would extend the
jurisdiction of the SEC and the reach of U.S. securities law into multiple, disparate sectors of the
U.S. economy that have nothing to do with the securities markets.
The court has an opportunity to draw a clear line here. While The Chamber agrees that
“investment contracts” that embody the essential attributes of securities are and should be subject
to SEC jurisdiction, tokens that may have been the subject of such an arrangement but are no
longer coupled with the investment opportunity and arrangement promoted by the issuer are not
themselves securities. And anonymous secondary transactions in those subject assets, whether or
not done on a marketplace that calls itself an “exchange,” are ordinary asset sales and nothing
more—not securities transactions.
B.
Recent Court Decisions Generally hold that Tokens are not Investment
Contract Securities
As tokens are a relatively new form of asset, judicial opinions analyzing tokens within the
existing legal and regulatory frameworks are also relatively new. Recent cases, however, support
the proposition that tokens—which can represent rights to almost anything and may have all kinds
11
Page 15 of commercial uses—are not themselves investment contracts. As the court explained in Ripple,
the subject of an investment contract—XRP tokens at issue in that case—is not itself inherently an
investment contract:
The plain words of Howey make clear that “an investment contract for
purposes of the Securities Act means a contract, transaction[,] or scheme.”
But the subject of a contract, transaction, or scheme is not necessarily a
security on its face. Under Howey, the Court analyzes the economic reality
and totality of circumstances surrounding the offers and sales of the
underlying asset. Howey and its progeny have held that a variety of tangible
and intangible assets can serve as the subject of an investment contract. In
each of these cases, the subject of the investment contract was a standalone
commodity, which was not itself inherently an investment contract. . . .
XRP, as a digital token, is not in and of itself a “contract, transaction[,] or
scheme” that embodies the Howey requirements of an investment contract.
SEC v. Ripple Labs, Inc. et al., No. 20 Civ. 10832 (AT), 2023 WL 4507900, at *8 (S.D.N.Y. July
13, 2023) (internal citations omitted).
The Ripple court then analyzed the different transactions involving the sale and distribution
of XRP and concluded that so-called “Institutional Sales” of XRP constituted securities
transactions. Id. at 2023 WL 4507900 at *14–16. The court found that these sales—which were
negotiated transactions typically involving written contracts and promotional materials that
emphasized Ripple's managerial efforts designed to generate profits—constituted investment
contract securities. Id. In contrast, the court found that initial distributions of XRP tokens through
blind bid/ask transactions on cryptocurrency exchanges were not securities transactions because
these sales were not coupled with representations and promises that Ripple would undertake efforts
to generate profits for the purchasers. Id. at 16. The Ripple court further recognized that the SEC’s
theories involving anonymous exchange transactions "are potentially inconsistent with its
enforcement in prior digital asset cases.” Id at 22.
The Ripple court’s skepticism illustrates the shaky foundations on which the SEC’s theory
12
Page 16 that it can regulate markets in the subjects of investment contracts rests. Although the Ripple court
expressly stated that it did not address whether secondary market sales of XRP constitute offers
and sales of investment contracts, the court’s reasoning about blind bid/ask initial sales
transactions on exchanges is instructive and should apply with even greater force to secondary
market transactions not involving the issuer. In distinguishing between the initial distribution and
secondary trading in XRP, the Ripple court stressed that a secondary market transaction in the
subject of an investment contract—a token—is not inherently a securities transaction.
A District of New Hampshire judge in the LBRY litigation seemingly reached the same
conclusion during oral argument. Although that court found an investment contract as to the
primary token offering and sale, the court explained during oral argument that it does not
necessarily follow that the token that was the subject of the contract was itself the security or that
secondary sales of the token should be restricted. The court recognized that tokens may have
consumptive uses and such tokens should be regulated as commodities rather than as securities:
[T]his issue of secondary acquirers of LBC [tokens] . . . is an issue that has
been of concern to me from the beginning, but it’s not an issue that the
parties have litigated with me. . . . it, does not necessarily follow that the
token is the security that is restricted. What I was focused on is what the
parties were litigating, [which] was whether these particular offerings of the
token were securities offerings, and I said that they were. That does not
necessarily mean that every . . . resale of the token violates the Securities
Act because it’s a restricted security. . . . At some point the SEC is going
to have to [litigate the issue of secondary transactions in non-securities
tokens], because there are a lot of tokens that have consumptive use that
maybe ultimately should be regulated as a commodity rather than as a
security. But that’s not me. That’s not my job. That’s the SEC’s job, and
I can’t make the SEC litigate something in front of me that it doesn’t want
to. . . . And I can tell you this, though: I don’t have the power to take up
issues that the SEC doesn’t choose to litigate with me, but I can be
absolutely clear I’m not going to do anything to restrict resales of LBC
[tokens] in this case, because the SEC had its chance to argue that in front
of me, and they are not arguing it. So, to the extent that somebody has some
kind of concern that this Court is going to restrict resales of LBC, I’m not,
because I think that raises interesting issues. . . . . I’m going to make it very
13
Page 17 clear that nothing in my order has anything to do with secondary sales . . .
.
Transcript of Motions Hearing Before Judge Paul J. Barbodoro, SEC v. LBRY Inc., No. 1:21-cv-260PB, Dkt. No. 105, at 24:24-25, 25:1-22, 26:4-11, 34:14-16 (D.N.H. Jan. 30, 2023) (emphasis added).
Other courts have recently reached similar conclusions. For example, in SEC v. Telegram
Group Inc., the court explained that “the security in this case is not simply the [token] . . . . Howey
refers to an investment contract, i.e., a security, as a ‘contract, transaction or scheme’ . . . that
consists of the full set of contracts, expectations, and understandings centered on the sales and
distribution of the Gram [token].” SEC v. Telegram Grp. Inc.,448 F.Supp.3d 352, 379 (S.D.N.Y.
2020). Yet another court further affirmed this same principle recently in SEC v. Terraform Labs
Pte. Ltd., 2023 WL 4858299 (S.D.N.Y. July 31, 2023). The SEC alleged that the creator or
allocator of the UST and Luna tokens engaged in an illegal securities offering under the Securities
Act of 1933, as amended (“Securities Act”). In its opinion, the court explained that:
To be sure, the original UST and LUNA coins, as originally created and when
considered in isolation, might not then have been, by themselves, investment
contracts. Much as the orange groves in Howey would not be considered securities
if they were sold apart from the cultivator’s promise to share any profits derived
by their cultivation, the term “security” also cannot be used to describe any cryptoassets that were not somehow intermingled with one of the investment “protocols,”
did not confer a “right to . . . purchase” another security, or were otherwise not tied
to the growth of the Terraform blockchain ecosystem. . . . So, in theory, the tokens,
if taken by themselves, might not qualify as investment contracts.”
Id. at 20 (emphasis added).
In sum, an investment contract is a contract, transaction or scheme that is the embodiment
of a security, as is common stock or a bond. Secondary transactions in stocks and bonds are
securities transactions because stocks and bonds are securities, as would be a secondary sale of the
investment contract. The subject of an investment contract, however, unlike the investment
contract, is generally not itself a security once it is separated from the bundle of rights,
14
Page 18 responsibilities, services, and promises that comprise the investment contract. The subject is just
an ordinary asset in most cases. See e.g., Howey, 328 U.S. at 299; Glen-Arden, 493 F.2d at 1034;
Bailey, 904 F.2d at 925.
C.
Transactions in Tokens that are not Securities do not Trigger Exchange Act
Registration Requirements
A token transaction in most cases is just an ordinary sale of an asset that has some
consumer, commercial or speculative value, like any commodity. Even assuming arguendo that
the tokens listed in the Complaint are the subject of an investment contract, an exchange or other
platform facilitating transactions in the tokens may need a license of some type, but not from the
SEC unless the asset is a security.
The SEC does not have jurisdiction over non-securities markets.
The SEC has
acknowledged the limitations of its jurisdiction in many contexts, even where the price of an asset
sold on an electronic marketplace varied wildly, the asset generated profits or losses upon resale,
or the asset attracted speculators. See, e.g., The Ticket Reserve, Inc., SEC No Action Letter, Sept.
11,
2003,
https://www.sec.gov/divisions/corpfin/cf-noaction/ticketreserve091103.htm,
and
Incoming Letter (“[n]either a seat ticket nor a right to acquire it is a security. . . . Nor does the
buying and selling of an event ticket, in the hope that the price of the ticket will increase, involve
the trading of a security.”) The Chamber is aware of no federal court decisions finding that a
platform facilitating the purchase and sale of the underlying subject of an investment contract
needed to register with the SEC under applicable federal securities laws.
The Second Circuit decision in Gary Plastics is not inconsistent. There, the court found an
investment contract in respect of bank certificates of deposit based on statements by a selling
broker that it “fully intends to maintain a secondary market for its customers which would
enable them to sell” the instruments they were buying from the broker. The broker committed
to repurchase the certificates of deposit itself if interest rates dropped, guaranteeing investors
both liquidity and a profit that they would not otherwise have made had they purchased the
15
Page 19 III.
The SEC’s Regulation-By-Enforcement Regime Raises Separation of Powers And
Due Process Concerns
The SEC is wrong to paint virtually all digital assets as securities. Tokens, on their own,
are not “investment contracts.” The SEC’s decision nevertheless to consider most digital assets as
securities raises grave separation of powers concerns under the Major Questions Doctrine, because
the SEC is asserting jurisdiction over a major part of the economy that Congress did not intend for
it to regulate. If the SEC is not compelled to restrict itself to regulating securities and instead can
regulate businesses that sells assets that may have been the subject of an investment contract, the
SEC's jurisdiction would extend to many marketplaces and intermediaries for ordinary products,
including e-commerce platforms for transactions in such assets, like eBay or Amazon.7 That
plainly implicates a major question.
The Major Questions Doctrine requires dismissal of the Complaint in deference to
Congress’s prerogative to decide how to regulate generally, “a significant portion of the American
economy.” See e.g., West Virginia v. EPA, 142 S. Ct. 2587, 2608-09 (2022); Biden v. Nebraska,
143 S. Ct. 2355, 2373 (2023). FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, (2000). In Alabama Association of Realtors v. HHS, the Court found that “$50 billion in
emergency rental assistance” was “a reasonable proxy for the [challenged policy’s] economic
impact,” and that this was enough to trigger major-questions scrutiny. 141 S. Ct. 2485, (2021). The Nebraska Court, noting that if $50 billion in rental assistance was enough to “trigger[]
analysis under the major questions doctrine,” then a student-loan cancellation amounting to “ten
certificate of deposit from the issuer and been exposed to interest rate risk. The court explained
that the customers relied on the skill and financial stability of the broker in making their
investment decision. Gary Plastics Packaging, 756 F.2d at 240.
Obviously, any company which offers investment contracts that are securities is subject to the
securities offering registration requirements under the Securities Act of 1933.
16
Page 20 times” that impact necessarily qualified as well. 143 S. Ct. at 2373.
The economic stakes implicated by the SEC’s theory in the Complaint dwarf those in the
cases cited above, given the size of the blockchain economy. See Cryptocurrencies –United States,
Statista, perma.cc/YK3U-XG24 (last visited Oct. 9, 2023). By comparison, the production value
of tobacco crops in 2000, the year the Supreme Court applied the major-questions doctrine to
tobacco regulation in Brown & Williamson, was only $2 billion. See USDA, Crop Production
Historical Track Records 264 (2023), perma.cc/9ZR2-GWB2. Clearly, in light of past Supreme
Court cases, the SEC’s actions raise an issue of vast economic importance, and is an attempt to
regulate a “significant portion of the American economy.”
Likewise, this case confronts issues of considerable political significance. “[D]eep . . .
political significance” can be found where Congress has “considered and rejected” the legislative
adoption of similar regulatory schemes. West Virginia, 142 S. Ct. at 2614 (quoting Brown &
Williamson, 529 U.S. at 144). In West Virginia, the Court faulted the government for adopting,
“at bottom,” a cap-and-trade program the likes of which Congress “ha[d] consistently rejected . . .
long after the dangers posed by greenhouse gas emissions ‘had become well known.’ “ Id. (quoting
Brown & Williamson, 529 U.S. at 144); See also, Nebraska, 143 S. Ct. at 2373–74 (doctrine
triggered where “[t]he Secretary’s assertion of administrative authority has ‘conveniently enabled
[him] to enact a program’ that Congress has chosen not to enact itself.”).
Similarly, Congress has long expressed interest in adopting a regulatory framework around
digital assets but has declined—as yet—to do so. Indeed, members of Congress have introduced
dozens of bills relating to digital asset regulation. See Brief of Amicus Curiae, Senator Cynthia
Lummis, SEC v. Coinbase Inc. et al., Case No. 1:23-cv-04738-KPF, Dkt. No. 53 (S.D.N.Y. filed
Aug. 11, 2023), p. 5–7 (listing major pieces of legislations introduced, including the Responsible
17
Page 21 Financial Innovation Act (RFIA), S. 2281, 118th Cong. (2023); The Financial Innovation and
Technology for the 21st Century Act (FIT21), H.R. 4763, 118th Cong. (2023); and the Digital
Commodities Consumer Protection Act of 2022 (DCCPA), S. 4760, 117th Cong. (2022)). This
level of congressional interest—including over whether digital assets should be classified as
securities—strongly counsels against allowing the SEC to appropriate the authority through
industry litigation. Rather than leaving these issues to Congress, the SEC has seemingly taken
matters into its own hands, using enforcement to do what Congress has declined to do through
legislation.
Finally, Ripple has sparked even more congressional interest, further demonstrating in real
time the “political significance” of the “major question” at hand. The House Financial Services
and House Agriculture Committees recently advanced bipartisan legislation to clarify the
regulatory status of digital assets. Hannah Lang, Crypto Bill Passes Congressional Committee in
Victory for Industry, Reuters (Jul. 26, 2023), perma.cc/8WYL-Y5L6. And Senator Cynthia
Lummis, who sponsors the Responsible Financial Innovation Act, which would create a
framework for classifying digital assets under existing commodities and securities regulatory
regimes, stated that Ripple “confirms the need for Congress to deliver a clear regulatory structure
for the digital asset industry that provides the highest level of consumer protection” and should
inspire Congress to pass legislation “uphold[ing] the Howey test as interpreted by the Southern
District of New York.” Senator Cynthia Lummis, Lummis Releases Statement in Response to
Ripple Decision (Jul. 14, 2023), perma.cc/XHE3-V78B.8 In short, a “major question” is plainly

Likewise, several members of Congress have urged the SEC to end its regulation-byenforcement regime and allow Congress to provide a path forward. See Letter from
Representatives French Hill & Dusty Johnson to SEC Chair Gary Gensler (Jul. 19, 2023),
perma.cc/UV5N-QPTH (warning that the SEC’s “regulate by enforcement . . . approach does
18
Page 22 presented as to whether the SEC has the statutory authority, and courts should not defer to the
agency’s interpretation of the statute but should insist on a clear statement from Congress
conferring upon the agency the “staggering” regulatory authority it asserts. Nebraska, 143 S. Ct.
at 2373.
CONCLUSION
For the reasons set forth above, Defendants’ Motion to Dismiss should be granted.
Dated: October 19,
/s/ Weisiyu Jiang
Steven F. Gatti*
Weisiyu Jiang
CLIFFORD CHANCE US LLP
2001 K Street NW
Washington, District of Columbia (202) 912-Steven.Gatti@cliffordchance.com
Weisiyu.Jiang@cliffordchance.com
Jesse Overall*
CLIFFORD CHANCE US LLP
31 West 52nd Street
New York, New York (212) 878-Jesse.Overall@cliffordchance.com
*pro hac vice to be filed
Attorneys for Amicus Curiae
The Chamber of Digital Commerce
not protect the public” and calling for a “statutory framework [that] would establish a process
for firms to come into the regulatory parameter . . . rather than relying on enforcement
actions”); Letter from Representative Ritchie Torres to SEC Chair Gary Gensler (Jul. 18,
2023), perma.cc/SM95-4HEY (condemning the SEC for “cho[osing] . . . to regulate not by
clear rule or guidance but by enforcement actions, often politically timed”).
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