Crypto markets panicked over weekend as SEC goes after Coinbase, Binance

The crypto markets saw a weekend of large red numbers, as investors panic-sold major cryptocurrencies such as Solana (SOL), Cardano (ADA), Litecoin (LTC), Avalanche (AVAX), Shiba Inu (SHIB), Uniswap (UNI), Chainlink (LINK), and Cosmos (ATOM). These cryptocurrencies experienced losses of 20% to 30% on Saturday, 10 June 2023.

The catalyst of this negative sentiment from investors came from news that the U.S. Securities and Exchange Commission (SEC) launched enforcement actions against the world’s largest crypto exchanges Binance and Coinbase.

Coinbase was charged last week for allegedly operating as an unregistered securities exchange, while SEC sued Binance for a different set of breaches, but not excluding what Coinbase was charged for. 

In addition, the SEC alleged that 13 crypto assets on top of 54 other crypto assets that have been labelled as a “security”, including major cryptos SOL, ADA, and MATIC available to Coinbase customers were classified as “crypto asset securities” and should have been registered with the commission. 

SEC lawsuit against Binance

The SEC pressed thirteen charges against Binance entities and CEO on 5 June, stating that “[Binance] have enriched themselves by billions of U.S. dollars while placing investors’ assets at significant risk. […] Defendants have engaged in multiple unregistered offers and sales of crypto asset securities and other investment schemes.”

SEC Chairman Gary Gensler criticised the industry’s non-compliant business model, and a multi-state task force has brought charges against Binance as well.

The SEC has sought court permission to seize Binance.US assets, leading Binance.US to halt deposits in dollars and switch to “crypto-only” operations.

Consequently, the US-compliant Binance subsidiary removed over forty trading pairs, including Tether’s USDT dollar-pegged stablecoin. The exchange ceased accepting U.S. currency and transitioned to crypto-only operations starting 7 June. 

SEC lawsuit against Coinbase

The SEC’s complaint against Coinbase claims that the company has made billions of dollars by operating as a middleman on crypto transactions while evading disclosure requirements meant to protect investors. 

Despite the enforcement action, Paul Grewal, Coinbase’s general counsel, said the company will continue operating as usual and has “demonstrated commitment to compliance.”

On the other hand, the SEC’s announcement regarding the 13 crypto assets on Coinbase has raised concerns about the trading of digital currencies on other exchanges.

Robinhood Markets, for instance, stated that as of 27 June, trading activities in SOL, ADA, and MATIC would be stopped.

Solana and Cardano issuers’ response to the SEC lawsuits

The Solana Foundation refuted the SEC’s classification of its native SOL token as a security, stating that it does not fall under the SEC’s definition of securities.

The foundation noted on a Twitter thread that it welcomes the engagement of policymakers to achieve legal clarity in the digital assets space. 

“This classification is significant because it subjects Solana and associated activities to a different set of regulations and compliant requirements. […] “We are actively engaging with legal experts and are in communication with the SEC to understand and address their concerns,” stated the Foundation in a letter to its community.

Similarly, a developer at Input Output Global (IOG), the company responsible for Cardano blockchain’s development, also rejected the SEC’s assertion that ADA is a security, claiming it does not meet the criteria defined by U.S. securities laws.

“Under no circumstances is ADA a security under U.S. securities laws. It never has been,” IOG said. “Understanding how decentralised blockchains operate is a fundamental component in creating responsible legislation.”

IOG said SEC lawsuits filed against crypto exchanges Binance and Coinbase, which included ADA in a list of crypto tokens that count as securities, contained “numerous factual inaccuracies.” The allegations will have no impact on IOG’s operations, the company said in their blog post.

So, is crypto actually a type of security?

By following the news around crypto and the SEC’s insistent remark about how most of them fall under its securities law, it became increasingly clear that a security is “in the eye of the beholder”. In other words, it depends on the initial frame of reference the government agency traditionally takes.

According to the SEC, the term “security” includes an “investment contract,” as well as other instruments such as stocks, bonds, and transferable shares.

“A digital asset should be analysed to determine whether it has the characteristics of any product that meets the definition of ‘security’ under the federal securities laws,” the regulator states in its guidance for analysing digital assets as investment contracts.

The Howey Test is a legal test used by the U.S. SEC to determine whether a transaction qualifies as an investment contract and, thus, is considered a security under federal law. It involves three key criteria that must be met in order for a transaction to qualify as a security:

1. A financial investment
2. A shared enterprise
3. An expectation of profits solely from the efforts of others.

If a cryptocurrency offering meets the criteria outlined in the Howey test, it may be considered a security and subject to U.S. federal securities laws. 

The Solana Foundation did private sales of tokens in the past years, which were reportedly performed under a Simple Agreement for Future Tokens (SAFT).

However, Bloomberg columnist Matt Levine noted that previous securities offers of SOL should not make the token a security now, as it now trades publicly with less disclosure and fewer investor safeguards than the SEC would like.

Levine wrote, “[Solana sold SOL tokens] to venture capitalists in private placements subject to appropriate SAFTs and lockups. The fact that those tokens now trade publicly, with less disclosure and fewer investor safeguards than the SEC would like, is, from the SEC’s perspective, unfortunate. But it’s not exactly Solana’s fault, or rather it is Solana’s fault but in a perfectly legal way.”

In Levine’s opinion, the SEC could “go sue thousands of crypto projects”, but many of them will have already become decentralised and well-distributed across international borders, even if initially US-law compliant public disclosures were done at the time of the tokens’ release.

The takeaways

The recent SEC actions against Coinbase and Binance have caused panic in the crypto markets, resulting in significant losses for major cryptocurrencies.

The SEC’s charges highlight the issue of unregistered securities exchanges and non-compliant practices. Binance.US halted dollar deposits and shifted to crypto-only operations, while other platforms like Robinhood stopped trading certain cryptocurrencies. 

Solana and Cardano issuers rejected the SEC’s classification of their tokens as securities. The question of whether crypto is a security is complex, and it depends on various factors.

Overall, these actions have created uncertainty and volatility, with the industry awaiting further clarity from regulators.

In future articles, we’ll take a deep dive on whether or not crypto assets fall under certain traditional laws, such as the U.S. SEC securities law, or whether there should be a unique law that specifically governs crypto assets.

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