U.S. Securities and Exchange Commission Sues Binance and Coinbase: Impacts and Analysis

SEC Lawsuits Against Binance and Coinbase

On the night of June 5th, Beijing time, the U.S. Securities and Exchange Commission (SEC) filed a lawsuit against the globally renowned cryptocurrency exchange Binance and its CEO, Changpeng Zhao. Just a day later, the SEC pointed its spear at another cryptocurrency exchange, Coinbase. In these two lawsuits, the SEC deemed 19 tokens as “securities”, a decision that may have far-reaching implications for the related tokens and even the entire crypto industry.

The 19 Cryptocurrencies Deemed as “Securities”

The tokens identified as securities on Binance include: ATOM, BNB, BUSD, COTI. For Coinbase, the identified securities are: CHZ, NEAR, FLOW, ICP, VGX, DASH, NEXO. Tokens listed on both Binance and Coinbase are: SOL, ADA, MATIC, FIL, SAND, MANA, ALGO, AXS.

（Image via Twitter）

Common Characteristics of These Cryptocurrencies

The cryptocurrencies deemed as securities by the SEC have three main commonalities. Firstly, each token has undergone an initial sale/fundraising event. Secondly, each token’s project team has promised to improve the protocol through continuous development (including business development or use of marketing funds). Lastly, the official social media of each token has displayed the features or advantages of the related protocol.

Why Deemed as “Securities”? The Howey Test

The Howey Test is the crucial basis for the SEC to determine these tokens as “securities”. The Howey Test judges whether “something” is an investment contract (security) based on four standards: it involves an investment of money, it is in a common enterprise, it comes with an expectation of profit, and the profit comes from the efforts of others or the issuer. According to the SEC, the 19 tokens in this lawsuit meet at least three of these four standards, thus creating an “expectation of profit”, satisfying the requirements of the Howey Test.

The Impact of Tokens Being Classified as Securities

If these 19 tokens are classified as securities, three implications will arise. Firstly, these tokens will not be tradable on U.S. exchanges. Secondly, these tokens may be delisted from U.S. exchanges (like Coinbase and Robinhood) for a while. Thirdly, these tokens will bring about regulatory adjustments and set a precedent for the industry.

The Challenge and Anticipation of Regulatory Framework

However, the Howey Test is an outdated and relatively limited framework, established in 1946. Applying it to the brand new digital asset industry is bound to present challenges. For the development and future growth of the industry, for lawful integration into the financial system, the crypto industry needs the SEC to clarify regulations and guidelines. Yet, this day has not come, and until it does, you need to buckle up because this journey is full of bumps.

Keywords: U.S. Securities and Exchange Commission (SEC), Binance, Coinbase, Lawsuit, Cryptocurrency Exchange, Securities, Howey Test, Delisting, Regulatory adjustments, Digital asset industry, Regulatory Framework