Binance.US is facing a class action lawsuit from investors who lost money in the collapse of the UST. It is accused of allegedly misleading marketing, as well as possible marketing of unregistered financial securities without the necessary approvals.
Binance.US under criticism after UST case
This Monday, the law firm Roche Freedman LLP filed a class action lawsuit in a California court against Binance.US over the collapse of the UST. Indeed, a group of investors, feeling aggrieved, are filing a lawsuit against the US branch of Binance and its CEO, Brian Schroder.
This complaint is based on two main points. First, that Binance.US was allegedly marketing unregistered securities through the stablecoin UST and second, that the advertisements made in this regard were misleading.
It is therefore the aforementioned secure nature of the UST that the plaintiffs’ collective considers misleading. The document presented by the law firm returns to the emotional and financial distress caused by the crash of the Terra ecosystem on individual investors.
Moreover, because of its investment in the project through Binance Labs, the link between the two entities is also blamed on the exchange. It is also questioned, the fact that the platform receives transaction fees on its products, regardless of the market direction, creating an interest in advertising it.
Of course, all these financial losses are to be deplored and the event is certainly a disaster. But it is also good to remember that when it comes to investing, everyone is supposed to act according to his or her own conscience and be able to take responsibility for any losses.
Moreover, the vast majority of the ecosystem was caught off guard in this case and even the biggest platforms lost a lot. Binance’s investment in Terra, which was valued at $1.6 billion, has in fact all but evaporated, as its CEO and founder Changpeng Zhao (CZ) mentioned on May 17:
The case of UST as an unregistered security
Beyond the marketing dimension, Binance.US is also accused of marketing unregistered financial securities to the American public. The group of plaintiffs claims that the platform is not in compliance with the Securities and Exchange Commission (SEC).
In the case of UST, reference is made to the Howey test, which would qualify it as a financial security. In short, to meet this test, a financial vehicle must, for example:
- Require a cash investment;
- Allow for a possible profit;
- Represent an investment in a joint venture;
- Have its performance linked to the actions of others.
While the first two points are fairly obvious, the other two need to be clarified. The character of an investment in a joint venture is argued by the fact that Terra was financed by different investors. As mentioned in the blockchain whitepaper, the pooling of these funds was to allow the ecosystem to grow.
Furthermore, the performance of UST or at least its dollar anchor was, according to the plaintiffs, dependent on Terraform Labs. Indeed, this is illustrated by the arbitration system set up for this purpose, encouraging investors to participate in the process through a financial consideration. It is also explained that the owners of UST were entitled to expect shares from Terra to keep the share price from collapsing.
However, there is no guarantee that Binance.US and its CEO Brian Schroder are risking anything in this UST complaint. But it is interesting to observe that after these events, different parties are looking for culprits to justify the losses.
What is certain is that one way or another, all this will have legal consequences. Whether it is through the various regulatory processes or legal decisions against certain players in the ecosystem.
