Legal experts suggest that the Securities and Exchange Commission's (SEC) lawsuits against Binance and Coinbase have cast doubt on the future prospects of the tokens involved. Following the announcement of these legal actions, the prices of the listed tokens have experienced a significant decline. However, the ultimate fate of these tokens remains uncertain at this time.
Legal experts informed CoinDesk that the recent lawsuits filed by the U.S. Securities and Exchange Commission (SEC) against the two largest crypto exchanges by market capitalization are likely to have a chilling effect on 19 tokens mentioned in the legal filings. This could potentially compel these tokens to relocate their operations to other regions around the world. However, the long-term consequences of these lawsuits remain uncertain.
In the meantime, the native cryptocurrencies of well-established protocols within the industry have suffered significant price drops, with all but one experiencing double-digit declines over the past seven days. This downward trend in prices reflects the impact of the legal actions taken.
Sean Farrell, the head of digital asset research at data firm FundStrat, commented that the lawsuits were not unexpected for those familiar with the SEC’s current approach. He added that the SEC aims to impede access points by imposing costly legal obligations, thereby incentivizing businesses to move their operations overseas.
Last week, the SEC accused Binance and Coinbase of offering unregistered securities to the general public, among other allegations. These lawsuits highlight ongoing debates regarding the classification of cryptocurrencies as securities, commodities, or in other categories. Securities are investments that can be traded and used to raise capital.
Early warning
Coinbase received an early warning from the SEC earlier this year when the agency issued a Wells Notice, indicating the possibility of suing the exchange. In response, Coinbase provided its reply in April. A Wells Notice serves as a formal notification from the SEC, indicating its intent to take enforcement action against a business. The SEC has been closely monitoring Binance for a number of years.
The lawsuit against Binance specifically targets the BNB token and the Binance-linked BUSD stablecoin. Speculation among crypto analysts suggests that major U.S. exchanges may have avoided listing BNB due to concerns about regulatory compliance. One analyst stated that exchanges likely perceive BNB as a security, given the centralized nature of its network.
The lawsuits also identified several other tokens as securities, including Solana (SOL), Cardano (ADA), Polygon (MATIC), Coti (COTI), Algorand (ALGO), Filecoin (FIL), Cosmos (ATOM), Sandbox (SAND), Axie Infinity (AXS), Decentraland (MANA), BNB (BNB), Voyager Token (VGX), Chiliz (CHZ), NEAR Protocol (NEAR), Flow (FLOW), Dash (DASH), NEXO (NEXO), and Internet Computer (ICP).
Attorneys Jesse Overall and Steve Gatti from Clifford Chance, a UK-based law firm, expressed that the status of these tokens is currently in a state of uncertainty. They emphasized that this situation creates risks and uncertainties for both U.S. markets and other participants involved in transactions with these tokens. Furthermore, pending a judicial determination, it also poses potential risks for the creators of these tokens. Notably, Gatti and Chance observed that the SEC has filed lawsuits against the exchanges for listing these tokens, rather than directly targeting the token creators.
Abroad
There is speculation among analysts that if the SEC emerges victorious in the lawsuits, crypto exchanges may be compelled to exit the U.S. market. According to Ron Geffner, a legal expert on SEC matters, the key question is whether this issue will proceed to court, and if so, many individuals within the crypto industry believe that a judge would provide a more impartial perspective than the SEC in determining whether cryptocurrencies should be classified as securities. Geffner shared his thoughts with CoinDesk, stating, “If the SEC wins, exchanges, issuers, and various service providers will need to reassess whether they wish to continue conducting business in the United States. If they choose to do so, they will have to determine how best to comply with federal securities laws, both in relation to past activities and future transactions.”
Sean Farrell, echoing Geffner’s sentiments, anticipates that if the SEC succeeds, the tokens in question will not be listed in the United States. Farrell expressed his hope that Congress will eventually pass legislation that establishes a safe harbor framework, allowing token teams to launch decentralized tokens over a specified time period.
Protocol Responses
The Solana Foundation issued a statement to CoinDesk expressing its belief that SOL is not a security. The foundation emphasized that SOL serves as the native token of the Solana blockchain, which is an open-source software project reliant on decentralized user and developer engagement for expansion and evolution.
Likewise, the NEAR Foundation, in a recent blog post, expressed its disagreement with the SEC’s inclusion of NEAR in the complaint. The foundation stated that it believes it has not violated any relevant U.S. securities laws. It further mentioned that it operates under regulation in Switzerland and that the NEAR token has been classified as a payment token, not a security, under Swiss law.
The Cardano development company IOG rejected the SEC’s assertion that ADA, the native token of the Cardano blockchain, is a security. IOG firmly stated that ADA has never been considered a security under U.S. securities laws.
Polygon Labs stated that MATIC was developed and deployed outside the U.S., with accessibility to a wide range of individuals but without specifically targeting the U.S. market.
We are proud of the history of the Polygon network – developed outside the US, deployed outside the US, and focused to this day on the global community that supports the network. MATIC was a necessary part of the Polygon technology from Day 1, ensuring that the network would be…
— Polygon (Labs) (@0xPolygonLabs) June 10, 2023
However, on Friday, crypto exchange Robinhood announced its decision to delist ADA, SOL, and MATIC on June 27. Other U.S.-based exchanges that currently list these tokens have not yet taken similar actions.
The lawsuits filed against Coinbase and Binance may prompt other exchanges to delist certain tokens to avoid potential charges in the future. According to Joshua Ashley Klayman, the U.S. head of fintech and blockchain at Linklaters LLP, a multinational law firm, the SEC’s complaint against Binance and its CEO, Changpeng Zhao (CZ), could serve as a roadmap for potential charges that other trading platforms and market participants may face down the line.
Price
Over the past week, all 12 tokens mentioned in the Binance lawsuit have experienced a decline in trading prices. Among them, Decentraland and The Sandbox have been hit the hardest, with drops of 26% and 27% respectively.
The tokens listed in the Coinbase lawsuit have also been trading in the red, with Chilliz’s CHZ token plummeting almost 30%.
Farrell suggested that the decline in token prices could present a favorable opportunity for investors to consider buying. He mentioned that the lawsuits and subsequent price declines may stimulate selling activity, potentially creating solid reentry points in the coming days.
Sheraz Ahmed, the managing partner at STORM, acknowledged that a short-term sell-off was expected and expressed his belief in a subsequent recovery. He highlighted that many of these tokens are associated with premium blockchain projects, leading him to predict a strong rebound similar to what was observed with the stock price of Coinbase. Despite a 13% drop, Coinbase quickly recovered to its previous levels, seemingly brushing off the incident.
Unpredictable terrain
Jesse Overall and Steve Gatti from Clifford Chance expressed uncertainty regarding how creators and users would respond to the complaints. They questioned whether users of the tokens would continue utilizing them in various applications and protocols as intended.
“We find ourselves in a legally unexplored realm, as these assets deviate from traditional securities, and there is limited judicial precedent regarding the application of federal securities laws to secondary transactions involving objects that were initially offered as part of an investment contract arrangement. Additionally, there is uncertainty about how such objects should be handled while awaiting a judicial decision on the matter,” Overall and Gatti elaborated.
