Do You See the SEC’s Hypocrisy in How it Treats ‘Crypto Asset Securities’?
Following a series of high-profile collapses in the crypto industry in 2022, most notably the bankruptcy of FTX, regulatory authorities in the United States have embarked on an intensified crackdown. They are placing crypto exchanges and other digital asset service providers under a microscope.
One regulatory body that has been particularly lively in this campaign is the US Securities and Exchange Commission (SEC). The SEC is an independent agency of the US federal government responsible for overseeing various aspects of the US securities industry, including securities exchanges, broker-dealers, investment advisors, and public companies. Their stated primary aim is to protect investors.
SEC’s Lawsuits Against Binance and Coinbase
After clamping down on Kraken and Circle earlier this year, the commission has zeroed in on the industry’s biggest players, Binance and Coinbase, filing two back-to-back lawsuits against the world’s top two crypto exchanges this week.
More specifically, on June 5, the SEC sued Binance and its founder Changpeng “CZ” Zhao for multiple wrongdoings, such as offering unregistered securities, the commingling of investors’ funds, and failing to prevent its BinanceUS customers from making trades on the exchange’s international platform.
“Among other things, the SEC alleges that, while Zhao and Binance publicly claimed that U.S. customers were restricted from transacting on Binance.com, Zhao and Binance in reality subverted their own controls to secretly allow high-value U.S. customers to continue trading on the Binance.com platform,” the agency wrote in its press release.
Similarly, a day later, the SEC charged Coinbase for “failing to register the offer and sale of its crypto asset staking-as-a-service program,” and securing billions of dollars in profits by “unlawfully facilitating the buying and selling of crypto asset securities.”
SEC Sees Roughly 67 Cryptocurrencies as Securities
In 2017, former SEC chair Jay Clayton issued a warning to crypto exchanges that many of their listed products likely qualified as securities and thereby should be registered under federal securities regulations.
To determine whether a cryptocurrency is a security, the regulator first takes into consideration whether the asset constitutes an “investment contract.” This is determined by evaluating if the asset satisfies the three criteria of the Howey Test.
According to this legal test, an investment contract “exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”
Today, the total number of crypto assets the SEC views as securities currently stand at an estimated 67 after the securities regulator added more than a dozen tokens in the wake of its legal actions against Binance and Coinbase.
Some of these cryptocurrencies, which the securities regulator refers to as “crypto asset securities,” include BNB, BUSD, SOL, ADA, MATIC, ATOM, SAND, MANA, AXS, FLOW, NEAR, and NEXO, among others.
But even long before its litigation against Binance and Coinbase, the SEC carefully explained how and why many of these digital assets are securities in their eyes.
For instance, in April, the commission filed a lawsuit against Bittrex and its former CEO, accusing them of operating an unregistered national securities exchange, broker, and clearing agency. In addition, six crypto tokens that were available for trading on Bittrex were deemed as securities, including OMG, DASH, ALGO, TKN, NGC, and IHT.
Meanwhile, in recent years, the SEC has also called out numerous crypto-related firms for turning substantial profits through private sales and unregistered offerings of their native tokens.
Namely, in its most recent suit against Coinbase, the agency in its lawsuit against Coinbase, the SEC mentions Solana Labs’ offerings of its native token, SOL, which it now also considers a security.
Among several SOL offerings, the SEC also pointed out that Solana Labs raised “over $314 million from investors, in a private sale that took place in August 2021.
On a similar note, the SEC discussed the sale of ADA tokens, conducted by its issuer Cardano blockchain. According to the document, IOHK, a company founded by Cardano co-founders, Charles Hoskinson and Jeremy Wood, “conducted a token sale during which they sold approximately 25.9 billion ADA in exchange for bitcoin,” ultimately raising around $62 million for their blockchain firm.
The SEC’s legal filing made no mention of the SOL or ADA offerings quoted above as being registered with the SEC nor exempt from such registration. This suggests then, that the offerings constituted unregistered securities offerings.
This would imply that such ‘crypto asset securities’ are in fact unregistered securities – meaning they are not eligible to US investors.
Even so, many of these supposed unregistered securities eventually managed to find their way onto crypto exchanges and stock brokerages, allowing unrestricted access to US investors.
What’s interesting is that the SEC has yet to be consistent in its approach here.
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The SEC’s Double-standard Approach
Many of the major cryptocurrencies that have been called out by the SEC and labeled as unregistered securities, including ADA, SOL, and MATIC remain accessible on US stock brokerages like Robinhood.
Robinhood is known for offering one of the most retail-friendly stock trading apps on the market. In total, it features 18 cryptocurrencies that users can access – even US users. Three of them—ADA, SOL, and MATIC—constitute unregistered securities based on the SEC’s recent legal filing against Binance and Coinbase.
So why has the SEC solely targeted crypto exchanges – while traditional stock brokerages are left untouched by the commission?
Last Friday, Robinhood announced that on June 27th, it will delist the three aforementioned cryptocurrencies. Yet this stems from their own initiative, rather than an SEC enforcement action.
The simultaneous listing of these cryptocurrencies on stock exchanges suggests a double standard in the regulatory approach, leading to speculation and questions about the SEC’s consistency in enforcing securities regulations across different types of trading platforms.
Taking this into consideration, as well as the fact that Coinbase vainly attempted to get itself and the broader crypto industry regulated in the SEC, it is difficult not to perceive a sense of hypocrisy, where the SEC cracks down on crypto exchanges for their involvement with unregistered crypto asset securities, while seemingly exempting stock brokerages from similar scrutiny.
Ultimately, the commission’s recent actions point to an apparent selective targeting of the crypto industry, raising concerns about a discriminatory approach. In other words, this differential treatment introduces suspicions that the US regulatory landscape may be seeking to actively push the crypto industry out of its borders.
Do you agree that there is a double-standard approach to regulating different types of trading platforms? Let us know in the comments below.