Introduction

Cryptocurrency buying, selling, and trading platform Binance U.S. and its Chief Executive Officer Brian Shroder have been sued by a United States-based investor who alleges that the crypto exchange marketed Terra USD falsely as a safe asset before the collapse of the stable coin’s value last month.

What is a stablecoin? A stablecoin is a digital token whose value is tied to the value of some traditional asset or any other medium of exchange, like the U.S. Dollar or gold. Stablecoins are known and promoted as safe havens for investment in the cryptocurrency market.

However, the value of Terra USD (which is considered to be a stablecoin in the crypto market) plunged last month. Reportedly, it broke its 1:1 dollar peg and contributed to a tumble in other cryptocurrency assets as well, including Bitcoin.

The lawsuit filed by the U.S. investor

In the lawsuit filed by the crypto investor against Binance and its CEO Shroder, the Utah-based Jeffery Lockhart said that the crypto exchange falsely marketed Terra USD as a safe stablecoin which is backed by a fiat currency, when it was in fact an unregistered security. 

As said by Jeffrey Lockhart, Binance is not registered with the United States government as a security exchange which saves the company from entirely disclosing information about assets being traded on its platform.

Lockhart’s representation, Tibor Nagy of Dontzin Nagy & Fleissig stated that Exchanges including Binance are critical enablers of the devastating failure of compliance with the securities laws. These exchanges enjoy massive profits by openly disregarding these laws and causing “real harm to real people”.

However, a spokesperson of Binance said that the cryptocurrency is in fact registered with Financial Crimes Enforcement Network, which is US Treasury Department’s unit and complies with all the necessary applicable regulations.

The Binance spokesperson added that the assertions made by the investor are not based on merit and will be defended vigorously. Further, the exchange will be delisting Terra USD, which the spokesperson says was a decision made before this lawsuit was filed.

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A separate case against Binance

In a different case filed against Binance in 2020, Binance was accused by investors of selling certain unregistered tokens and not registering as a broker-dealer or exchange. The lawsuit was dismissed by a federal judge in Manhattan in March. The federal judge stated that the investors waited for a long time after their losses to take legal action and that the securities law in the U.S. did not apply in this case as Binance was not a domestic exchange. 

The lawsuit filed by Lockhart, on the other hand, focuses on the U.S. unit of Binance. Moreover, the case was filed just a few weeks after the collapse of Terra US. The lawsuit was filed after a bipartisan group of U.S. Senators proposed legislation last week to have the CFTC (Commodity Futures Trading Commission), and not the Securities and Exchange Commission (SEC), set the ground rules of crypto regulation. The CFTC has been friendlier toward cryptocurrencies, as the SEC found cryptocurrency assets should be treated as securities. 

Conclusion

The lawsuit filed by investor Jeffrey Lockhart against Binance U.S. and its CEO Brian Shroder highlights the legal challenges the cryptocurrency exchange faces following the collapse of Terra USD. Lockhart accuses Binance of falsely marketing Terra USD as a stable and safe investment when it was, in fact, an unregistered security. Binance, however, maintains that it is compliant with U.S. regulations and plans to vigorously defend the lawsuit. This legal dispute comes amid broader discussions around cryptocurrency regulations, with recent proposals suggesting the CFTC, rather than the SEC, should oversee crypto activities in the U.S.

FAQs

Q1: What is Terra USD?
A: Terra USD (UST) is a stablecoin, meaning it is typically pegged to the U.S. dollar and is meant to maintain a consistent value. However, it recently lost its peg, causing a decline in value and contributing to a broader collapse in cryptocurrency markets.

Q2: Why is Binance being sued?
A: Binance is being sued for allegedly marketing Terra USD as a safe, fiat-backed asset, despite the token being an unregistered security. The lawsuit claims that Binance failed to disclose critical information about the risks associated with the stablecoin.

Q3: What is Binance’s response to the lawsuit?
A: Binance has denied the claims, stating that it complies with U.S. regulations and will defend itself vigorously. The exchange also noted that it had already decided to delist Terra USD before the lawsuit was filed.

Q4: Has Binance faced legal issues in the past?
A: Yes, in 2020, Binance was sued by investors for selling unregistered tokens. However, the lawsuit was dismissed by a federal judge who ruled that U.S. securities laws did not apply to Binance as it is not a domestic exchange.

Q5: What is the future of crypto regulations in the U.S.?
A: There are ongoing debates in the U.S. about who should regulate cryptocurrencies. Some lawmakers have proposed that the Commodity Futures Trading Commission (CFTC), which has been more lenient toward crypto, should oversee crypto regulations, rather than the Securities and Exchange Commission (SEC), which treats cryptocurrencies as securities.