Binance Marketed BUSD as a Stablecoin but Sold It as a Security

FACTS

VII. BINANCE AND BAM TRADING ENGAGED IN UNREGISTERED OFFERS AND SALES OF SECURITIES.

B. Binance Offered and Sold BUSD as a Security.

315. From September 2019 through February 2023, Binance offered and sold BUSD to U.S. investors as part of a profit-earning scheme within the Binance ecosystem, touting returns for investors from simply buying BUSD or deploying it in Binance profit-generating programs.

316. Since its inception, BUSD has been offered and sold as an investment contract and, therefore, as a security.

317. BUSD is an ERC-20 token issued on the Ethereum blockchain. Pursuant to a September 5, 2019 “Stablecoin as a Service Agreement” (“BUSD Agreement”) between Binance (Switzerland) AG, a Binance affiliate, and Trust Company A, the parties agreed to “build and manage the platform on which BUSD can be issued and redeemed” in exchange for one U.S. Dollar and to maintain reserves supporting redemptions. Binance’s affiliate agreed to “list, market, and promote BUSD” to investors. Binance has since marketed BUSD as a so-called “stablecoin”—purportedly backed with cash (and cash equivalent) reserves and redeemable on a 1:1 basis for U.S. dollars—that allows investors to participate in various profit-making schemes available through the Binance ecosystem. Trust Company A agreed to invest the BUSD reserves (essentially, proceeds from investors’ BUSD purchases) in profit-generating opportunities for the benefit of both Trust Company A and Binance. Trust Company A and Binance agreed that they would evenly split the net interest revenue earned on the reserves underlying BUSD.

318. As of February 10, 2023, over $16 billion worth of BUSD were in circulation. Approximately 90 percent of outstanding BUSD at that time was held in wallets controlled by Binance, most of which was BUSD deposited by investors and held in Binance omnibus wallets.

319. On February 21, 2023, NYDFS—which regulates Trust Company A as a limited purpose New York trust company and authorized it to offer BUSD subject to anti-money laundering, anti-fraud, and consumer protection laws—directed Trust Company A to stop minting BUSD “as a result of several unresolved issues related to [Trust Company A’s] oversight of its relationship with Binance.”

320. From September 2019 through February 2023, Binance offered and sold BUSD to investors on the Binance.com Platform. Investors in the U.S. and elsewhere could also purchase BUSD from Trust Company A.

321. BUSD purchasers invested in a common enterprise with each other and with Binance—the BUSD ecosystem through which BUSD holders and Binance could and did earn returns through various forms of capital deployment. The proceeds from investor purchases of BUSD were purportedly pooled in reserves, and Binance earned 50 percent of the investment returns on those pooled assets (which increased as more investors purchased BUSD). Binance then used at least a portion of those returns to enable and promote the Binance ecosystem that gave BUSD its profit potential.

322. Binance has, from the outset, marketed BUSD’s profit-earning potential and referred to the various “APYs” (annual percentage yield) that investors may earn with respect to their BUSD holdings. The BUSD profit opportunities promoted by Binance include the“Binance Earn” programs, as well as margin and futures products.

323. For instance, Binance offered a “BUSD Reward Program” that promised interest payments to BUSD investors merely for holding BUSD on the Ethereum blockchain. Binance explained to investors that it would “rank all crypto addresses that hold BUSD based on the average daily amount of BUSD held within 30 days. After that, we distribute a set amount of BUSD according to the percentage of the crypto addresses’ holdings relative to the total market cap of BUSD.” Binance continued: “In effect, the BUSD Reward Program allows you to earn additional funds on top of what you already earn from DeFi.” In other words, while investors’ profits with respect to Binance’s crypto asset security BNB came in the form of price appreciation, BUSD investors’ expectation of profits came from the potential for direct, interestlike payments made by Binance, in part from the proceeds of deploying BUSD investors’ capital.

324. Binance touted and promoted these profit-making opportunities. For example, in a September 2020 article posted on its website, Binance celebrated BUSD hitting a $1 billion market cap “in just 261 days, the fastest-ever for a stablecoin.” A subsequent Binance blog posts on its website touted “various earning opportunities for holding BUSD in Binance,” including “Binance Flexible Savings, through which you can earn a bonus BUSD at a 2%-5% APY” and “an auto-deposit function, which automatically transfers BUSD from your spot wallet to Flexible Savings, making it possible for you to earn even if you forget to proactively save,” a “Binance Launchpool” where a user’s “BUSD deposit will get you a share of the free tokens from the offerings that launch on the platform and include BUSD in their yield options,” and “DeFi staking offerings” that “can give you around 20%-30% APY.”