A recent Second Circuit decision underscores that decentralized crypto exchanges with no claimed “home” jurisdiction face a substantial likelihood of exposure to U.S. securities laws. In Williams v. Binance, 96 F.4th 129 (2d Cir. 2024), the Second Circuit held plaintiffs adequately alleged crypto token purchases made on Binance’s trading platform by U.S. persons were domestic transactions and subject to U.S. securities laws on two independent grounds. First, it was plausible that plaintiffs’ purchase orders were matched with sellers on servers located in the U.S. Second, Binance’s Terms of Use stated orders became irrevocable once they were sent to Binance, which the plaintiffs alleged occurred from their homes in the United States. The Court’s extraterritoriality analysis focused on Binance’s express disclaimer of a physical presence or geographical headquarters and the inapplicability of any other country’s securities regime. These factors created the possibility of a regulatory vacuum absent imposition of U.S. securities laws. Underscoring this point, the Court reasoned that “[e]ven if the Binance exchange lacks a physical location, the answer to where [it matches transactions] cannot be ‘nowhere.’” Williams, 96 F.4th at 138.
It will take years before the full implications of Williams become clear; but what is already clear is that U.S. courts are likely to be skeptical of corporate structures that appear to leave a company immune from litigation anywhere. This skepticism is particularly relevant to crypto exchanges and other decentralized actors, which may not have or maintain a traditional “home” jurisdiction or base. Such decentralized actors may wish to consider taking steps to reduce the risk of exposure to U.S. securities laws, including affirmatively establishing a domicile outside the U.S. by opening a non-U.S. office or otherwise formally submitting to regulation by another nation, using servers data centers, and other computer network infrastructure outside of the United States, and drafting terms of service or other contractual agreements to provide that transactions become irrevocable in a location outside the U.S.
Factual Background
Plaintiffs purchased “security tokens” on Binance, an online platform for buying and selling crypto assets, pursuant to Binance’s terms of use (“Terms of Use”). Security tokens are a type of digital asset that represent transferred ownership rights or asset value to a blockchain token. The Terms of Use “dictated that once a trade order was placed, Binance has the right to reject a user’s request to cancel it . . . [and] pursuant to the Terms, once matching occurred, the order could not be cancelled at all.” Williams, 96 F.4th at 135.
Plaintiffs sued Binance after their security tokens lost most of their value, alleging the purchased tokens were unregistered securities and that Binance had operated as a broker-dealer in violation of U.S. federal securities laws. In response, Binance argued, among other things, that plaintiffs’ claims constituted an impermissible extraterritorial application of federal securities laws because Binance does not have a physical or official location in the United States.
The district court granted the defendants’ motion to dismiss, holding that plaintiffs’ claims were impermissibly extraterritorial under Morrison v. Nat'l Australia Bank Ltd., 561 U.S. 247 (2010), which limited the application of the Securities Exchange Act to “(1) securities listed on domestic exchanges, and (2) domestic transactions in other securities.” Id. at 267. In particular, the district court rejected plaintiff’s arguments plead that Binance was a domestic exchange or that plaintiffs engaged in domestic transactions, based on plaintiffs’ allegations that (i) Binance was hosted by U.S.-based servers and had certain U.S. contacts (e.g., English-language text on its website, employees in California, and job postings in the United States); and (ii) plaintiffs bought tokens in the United States.
As described in greater detail below, the Second Circuit ultimately reversed the district court’s holding on extraterritoriality, finding that plaintiffs’ adequately alleged that the transactions at issue were domestic. In reaching this conclusion, the Court focused on certain key facts including that: (i) Binance purports to have no physical location anywhere in the world; (ii) despite moving its nominal headquarters to Malta in 2018, Maltese regulators disclaimed any responsibility for regulating Binance in 2020; and (iii) Binance’s CEO emphasized publicly Binance’s “decentralized manner” of operations and affirmative “reach[ing] out to our users across more than 180 nations worldwide.” Williams, 96 F.4th at 133. Given that Binance essentially claimed to not be subject to any particular jurisdiction, thereby removing international comity issues that motivated Morrison, the Second Circuit adopted a more flexible approach in analyzing whether the transactions were domestic, in order to avoid a regulatory vacuum.
At issue in Williams was whether plaintiffs’ purchase of security tokens was a “domestic transaction.” In the Second Circuit, a transaction is “domestic” if irrevocable liability was incurred, or if title was transferred, within the United States. Absolute Activist Value Master Fund Ltd. V. Ficeto, 677 F.3d 60, 62 (2d Cir. 2012). Irrevocable liability attaches when parties “becom[e] bound to effectuate the transaction or enter[] into a binding contract to purchase or sell securities.” Miami Grp. V. Vivendi S.S. (In re Vivendi, S.A. Sec. Litig.), 838 F.3d 223, 265 (2d Cir. 2016) (internal quotation marks omitted). Irrevocable liability can attach in “more than one location,” Fed. Hous. Fin. Agency v. Nomura Holding Am., Inc., 873 F.3d 85, 156 (2d Cir. 2017), and at more than one time, Choi v. Tower Rusch. Cap. LLC, 890 F.3d 60, 68 (2d Cir. 2018) (holding liability could attach between buyer and seller both at matching prior to clearing and upon being cleared and settled on an exchange).
The Second Circuit’s Decision
The Second Circuit in Williams reversed the district court, holding plaintiffs plausibly alleged “that the transactions at issue are domestic transactions subject to domestic securities laws because the parties became bound to the transactions in the United States, and therefore irrevocable liability attached in the United States.” Williams, 96 F.4th at 133. The Court reached its conclusion on two independent grounds: (1) it was plausible that plaintiffs’ purchase orders were matched with sellers on servers located in the U.S.; and (2) Binance’s Terms of Use stated orders became irrevocable once they were sent, which the plaintiffs alleged occurred from their homes in the United States.[1]
Matching
The parties agreed irrevocable liability attached when plaintiffs’ purchase orders were “matched” with sellers; the question for the Second Circuit was where matching occurred. Plaintiffs conceded Binance—which was alleged to lack physical location—was not “in the United States,” arguing instead that because their purchase orders were submitted from locations in the United States, and because many of the computer servers and data centers Binance uses to operate its exchange are in California, plaintiffs’ trades were matched there. The Court agreed, finding it plausible that plaintiffs’ trade orders were matched in the United States.
The Court reasoned that “[w]hile it may not always be appropriate to determine where matching occurred solely based on the location of the servers the exchange runs on,” it was appropriate to do so in Williams, “given that Binance has not registered in any country, purports to have no physical or official location whatsoever, and the authorities in Malta, where its nominal headquarters are located, disclaim responsibility for regulating Binance.” Id. at 139. The Court also emphasized that “the application of United States Securities law here does not risk ‘incompatibility with the applicable laws of other countries,’” because “Binance notoriously denies the applicability of any other country’s securities regulation regime, and no other sovereign appears to believe that Binance’s exchange is within its jurisdiction.” Id. at 139.
Plaintiff’s Submission of Trades and Payments on Binance
The Court also held plaintiffs “plausibly alleged that irrevocable liability attached when they entered into the Terms of Use with Binance, placed their purchase orders, and sent payments from the United States.” Id. at 139. Because Binance disclaimed having a physical location, the Court found it had “particular reason to consider other factors that our cases have found relevant to the irrevocable liability analysis,” including “facts concerning the formation of contracts, the placement of purchase orders, the passing of title, or the exchange of money.” Id. at 140 (emphasis in original). The Court reasoned that when plaintiffs “sent buy orders and payments on the Binance platform,” they were “irrevocably committed to the investment while in their states of residence,” particularly since the Terms of Use dictated that consumers could not revoke a transaction after they placed trial orders, while permitting Binance to reject any cancellation request. Id. at 140 (internal quotation marks omitted). The Court distinguished precedent holding that “mere placement of a buy order in the United States” is not sufficient to allege a purchaser incurred irrevocable liability in the United States. Id. at 140. It noted that since Binance “disclaims any location, foreign or otherwise,” “the sovereignty and comity concerns that at least partially motivate the careful policing of the line between foreign and domestic transactions . . . are less present.” Id. at 140.
Implications of Williams v. Binance
Plaintiffs in other cases can be expected to argue that Williams significantly lowers the bar for imposing U.S. securities laws to claims against decentralized actors—including crypto exchanges—as compared to other, more traditional defendants. As the Ninth Circuit observed in Daramola v. Oracle America Inc., server connections to and through the United States are so common that treating them as domestic conduct “would effectively negate the presumption against extraterritoriality.” 92 F.4th 833, 842-43 (9th Cir. 2024). Similarly, if, as in Williams, it was generally true that a transaction is domestic where plaintiffs send purchase orders and pay money in the United States, it could expand the reach of United States securities law.
The Williams decision may be limited by the distinctions it draws between Binance, which disclaims any physical location and is not otherwise regulated by any other sovereign’s securities laws, and litigants with a more traditional geographic structure based in other jurisdictions. Williams, 96 F.4th at 137-140. The implication of the Court’s reasoning is that where litigants are not otherwise regulated and have no geographic “home,” U.S. securities law is more likely to apply and fill the vacuum.
Crypto exchanges and other decentralized actors who do not intend to be subject to U.S. securities law may therefore wish to consider a variety of organizational options, including: (i) opening an office or submitting to regulation in a different jurisdiction; (ii) using computer servers, data centers, and other electronic infrastructure located outside the United States; and (iii) drafting their terms of use or terms of service in a manner that provide exactly when and where orders and other transactions become binding and irrevocable.
[1] The Court also concluded that: (i) plaintiffs’ federal securities claims were timely, as they accrued when Plaintiffs purchased or committed to purchase security tokens in the year prior to filing, Williams, 96 F.4th at 142, 145; and (ii) plaintiffs’ related claims under state securities laws (commonly know as “Blue Sky” laws) on behalf of absent class members should not be dismissed at this stage of the proceeding because “any concern about whether it is proper for a class to include out-of-state, nonparty class members with claims subject to different state laws is a question of predominance under Rule 23(b)(3) to be decided after the motion to dismiss stage.” Id. at 145.
