In its lawsuit filed against crypto exchange Binance on Monday, the Securities and Exchange Commission alleged that several prominent cryptocurrencies—including Solana, BNB, and the native tokens for Polygon and Cardano—are securities.
This is a significant development for the crypto industry as the SEC’s decision to name a specific token as a security can make brokers reluctant to offer it, which in turn can depress its liquidity and price.
The SEC’s latest allegations, however, come at a time when the legal status of many cryptocurrencies remains unclear. Currently, the SEC is jousting with a sister agency, the Commodity Futures Trading Commission, over whether the assets are securities—as the SEC alleges—or commodities, which comes with fewer regulatory obligations. This uncertainty has been a persistent concern for the crypto industry.
Under Chair Gary Gensler, the SEC has sought to expand the list of cryptocurrencies that fall under the security category, meaning they represent an investment contract and must register with the agency. Gensler has stated on several occasions that he believes nearly every cryptocurrency is a security, with the exception of Bitcoin.
In its lawsuit against Binance, the SEC alleges that the exchange was offering unregistered securities, including two cryptocurrencies associated with the company: BNB, the exchange token for Binance, and BUSD, a Binance-branded stablecoin that the exchange launched with U.S. crypto firm Paxos. Although Gensler has hinted that Ether might qualify as a security, ETH was not included in the lawsuit.
Many crypto industry participants accuse Gensler of “regulation by enforcement,” meaning that rather than engage in rulemaking to create guardrails for the volatile sector, the SEC advances its positions through lawsuits and enforcement actions.
Monday’s lawsuit vastly expands the SEC’s list of alleged securities to include Filecoin’s FIL, Sandbox’s SAND, Decentraland’s MANA, Algorand’s ALGO, and Axie Infinity’s AXS. In mid-May, crypto firm Grayscale announced that it had received a letter from the SEC alleging that FIL qualified as a security, which drew criticism from the industry.
Interesting. Grayscale had disclosed a few weeks ago that the SEC staff thinks FIL is a security. They have a Solana trust too; am I right that this is the first time the SEC has publicly taken this position w/r/t SOL? https://t.co/DvYUUKcivU https://t.co/NiQaetQIqF
— Bank Reg Blog (@bank_reg) June 5, 2023
The SEC also argued in Monday’s filing that Solana’s deflationary model, powered by a burning mechanism, “has led investors reasonably to view their purchase of SOL as having the potential for profit to the extent there is a built-in mechanism.” The agency cites promotional statements made by Solana’s parent company to increase demand for its token.
In a statement shared with Fortune on Tuesday, Cardano Foundation CEO Frederik Gregaard said, “The Cardano Foundation disagrees with the recent qualification of ADA as a security under US law. We look forward to the continued engagement with regulators and policymakers to achieve legal clarity and certainty on these matters.”
The price of Bitcoin, Solana, and other tokens tumbled on Monday in the wake of the lawsuit.
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