In recent months, the US Securities and Exchange Commission has designated dozens of cryptocurrencies as securities, but has offered little explanation as to why it reached that conclusion. There is no doubt that these and many other cryptocurrencies are bought as investments, but the SEC claims that they also fall under the legal definition of a security. This would require issuers to register tokens with the SEC or meet issuance requirements.
The ban has cost the digital asset industry dearly. The 19 cryptocurrencies named in SEC cases against Binance and Coinbase lost a combined $5 billion in value after complaints were filed in early June. Adding the tokens listed in its lawsuits against the two major cryptocurrency exchanges brings the number of assets the agency considers securities to at least 65. These include major cryptocurrencies such as bnb, busd, cardano, solana, and polygon, and together they have a market cap of over $100 billion, making up a significant portion of the $1.2 trillion industry.
"The tokens in the complaints don't have much in common other than they're blockchain-based crypto assets," said Mike Selig, of counsel at the New York-based law firm Willkie Farr & Gallagher. It turns out that these include the assets of the main blockchain networks, metaverse and game tokens, stablecoins and various service tokens that offer certain functions. "By naming such a broad range of differentiated tokens, the SEC is effectively signaling to the market that it treats most tokens as securities," adds Selig.
Speaking at the Piper Sandler Global Exchange and FinTech Conference in New York earlier this month, SEC Chairman Gary Gensler reiterated his view that the "vast majority" of crypto tokens meet the Howey test, a set of standards that determine whether a transaction qualifies. as a transaction. . transaction investment contract and is therefore considered a security and must be registered with the SEC. According to the Howey test, there is an "investment contract" where money is invested in an ordinary business with a reasonable expectation of profiting from the efforts of others.
He also dismissed criticism that his agency did not provide "fair notice," noting that many crypto companies "may make a conscious economic decision to bear enforcement risk as a cost of doing business."
However, the agency and Gensler himself have been inconsistent at best in their arguments in these cases. "I think the Commission did an excellent job of explaining in detail why the purchase of XRP was a securities transaction," said a former SEC official who spoke on condition of anonymity but is not actually here. to happen . . When you read complaints, I don't see the same level of analysis. One would think that they would disclose the facts and circumstances that led them to believe that they were securities.
While the SEC says its crackdown on crypto assets is a way to protect investors from rampant fraud and market manipulation of digital assets, the common belief among industry insiders is that the regulator is simply cracking down on the industry. after several high-profile bankruptcies resulted in billions in losses.
Richard Miko, managing director and general counsel of US payment infrastructure provider Banxa, agrees that there is little logic in classifying SEC tokens. “One could argue that this mass labeling of these coins as securities is actually a well-intentioned but misguided attempt to slow the adoption of digital assets in general in the United States. However, even if that's true, adoption is still going on, it's just happening outside of the US.” As we clearly see in places like Hong Kong, Dubai and the EU,” Miko said in an emailed comment to Forbes .
At the same time, domestic exchanges were forced to delist the tokens. Just months after completing its $155 million acquisition of rival Apex Crypto, New York-based digital asset holding and trading platform Bakkt has removed the top three SEC-listed cryptocurrencies by market cap: solana, polygon and cardano.
"These actions are never easy. What I mean is that you earn from the platform both for you and for your partners,” said Mark D'Annunzio, general counsel at Bakkt. “But I think about it this way. this is a decision we are making in the short term given the volatility of the environment, and as the hurdles become a bit clearer, we intend to re-evaluate coin quotes when we reach a point. where we are satisfied that we can make it to your specifications.
According to cryptocurrency data provider Kaiko, the share of delisting on US platforms will grow to 22% in 2023, up from 8% last year, driven mainly by Bittrex and Binance.US. Both exchanges have been accused by the SEC of violating securities laws.
While the SEC doesn't have the resources to name every non-Bitcoin crypto asset as a security in these complaints, the representative sample of popular tokens it chose sets a precedent that could be extended to a broader range, according to Selig. .
“However, the Howey test determines what is an investment contract and what is not. The individual facts and circumstances surrounding each token, its initial offering, and sale must be evaluated as part of this test," he says. "The SEC probably does not want to expend the resources to discuss whether each individual token is a security. , but this. that is what the Howey test requires. We will likely continue to see new tokens offered and traded as non-securities under new legal theories until the SEC or Congress act and create a viable regulatory framework for crypto-asset securities.
Meanwhile, Hamburg-based bank Berenberg believes the SEC's next targets are likely to be stablecoins and decentralized finance (DeFi). After reviewing Gensler's public statements and some of the lawsuits filed by the commission and other regulators in recent months, "we concluded that the next SEC targets will likely be (1) stablecoins, including both USDc and tether, which are likely to be : labeled as unlisted securities and (2) DeFi protocols,” Berenberg stock analyst Mark Palmer wrote in comments shared with Forbes .