Are Crypto Assets Securities, as the SEC Says?

US authorities have filed high-stakes lawsuits against Coinbase and Binance, arguing that they disobeyed the law by not registering as a securities exchange, broker, or clearing agency and that the tokens they trade in are securities.

Coinbase and other industry leaders have been clear that cryptocurrencies do not meet the definition of securities under US law because they run on a distributed database maintained by a network of computers, known as a blockchain.

They argue that the Securities and Exchange Commission's (SEC) inability to define whether or not digital assets constitute securities clearly makes it difficult for market participants to make informed decisions.

Tuesday in Manhattan federal court, the SEC filed a lawsuit against Coinbase, the largest US cryptocurrency exchange, accusing it of operating unlawfully by failing to disclose certain information.

Solana, Cardano, and Polygon are just some tokens the SEC claims Coinbase customers could trade without proper registration as securities.

The SEC is asking for monetary fines and a court order for Coinbase to comply with federal securities law in the United States.

While some, including the European Union, have begun working on crypto legislation, the United States has taken the lead in enforcing existing laws.

The United States Supreme Court may hear arguments in a case against Coinbase.

Given the stakes, the high-profile parties, and the generally cut-and-dry nature of the facts, this case has a better chance of making it to the Supreme Court than previous claims against competitors like Binance Holdings and Ripple Labs.

The answer to this legal problem may pave the way for widespread government enforcement of crypto sector compliance with securities laws.

History of SEC's Allegations

More than a hundred cases alleging that different cryptocurrencies are securities have been filed by the SEC in the previous decade.

The Coinbase case, however, will put the regulator's authority over the sector to the ultimate test.

This week, the SEC has also filed suit against Binance, the largest cryptocurrency exchange in the world, alleging that it participated in "an elaborate scheme to evade US federal securities laws."

Coinbase has denied those allegations and said it does not list any securities. Binance intends to fight against the charges, calling the matter "disappointing."

How Does American Law Define "Security"?

The SEC claims that crypto assets are securities on a 1946 Supreme Court ruling. Investors in W. J. Howey Co.'s orange fields in Florida were central to this issue.

The court determined that investment contracts, which include "an investment of money in a common enterprise with profits to come solely from the efforts of others," are a kind of security.

The court ruled that the SEC had the authority to try to stop Howey from selling harvest contracts for fractional interests in the property to investors outside of California.

In contrast to commodities, securities are subject to stringent regulations and call for extensive disclosures to protect investors from harm.

What About Bitcoin?

Well, not according to a few experts. That is based on the SEC's allegations based on the 1946 Supreme Court ruling.

They argue that Bitcoin is not a security since it relies on something other than the efforts of developers or management to generate returns for investors.

Attempts have been made by several blockchain projects to fund their operations in two phases: first, by providing securities by SEC requirements, and second, by gifting or selling cryptocurrency to those investors after constructing a working blockchain.

But experts also stated that the SEC has never defined what it takes to make something not a security.

So, Are All Other Cryptocurrencies Securities?

Settlements in several of the SEC's crypto-related investigations have involved penalties and promises to comply with US law.

This has often required giving up on the US market or a cryptocurrency project altogether.

Judges have sided with the SEC in rare cases where it was argued that certain cryptocurrencies qualify as securities.

In those decisions, the court found that developers' claims that the value of their digital assets was tied to efforts to expand or maintain the linked blockchain networks demonstrated that investors' gains were contingent on the "efforts of others."

The courts have also ruled that the buyers of such tokens were members of a "common enterprise" since their money was pooled by the token issuer and used to create the necessary infrastructure.

The next case to be determined is the SEC's complaint against Ripple Labs about XRP, the sixth-largest cryptocurrency by market cap.

Since the cryptocurrency's corresponding blockchain was functional before XRP was sold, Ripple maintains that there was no shared venture.

On Twitter, Coinbase CEO Brian Armstrong stated that after the complaint was filed, the business was "proud to represent the industry in court to get some clarity around crypto rules finally."

However, it may be years before the underlying condition is resolved.

Like what you read? Our weekly Business Bulletin wraps up the most important business and economic developments in the industry, along with macroeconomic views and opinions. To avoid FOMO and access member-only features, click here to subscribe. It's free.