The United States Securities and Exchange Commission (SEC) has recently been scrutinized for its position on cryptocurrencies, particularly in a legal dispute involving the crypto exchange Binance. This contention arises from the SEC’s classification of certain digital assets as investment contracts, a perspective that has sparked debate and criticism within the crypto community.
Dispute over crypto asset classification
The core of the conflict is the SEC’s lawsuit against Binance and Coinbase, filed in June, alleging that these platforms functioned as unregistered securities exchanges. The SEC asserts that 12 cryptocurrencies, including FIL, BUSD, BNB, ADA, and AXS, are securities based on the Howey Test. This standard is a benchmark in U.S. law for determining the nature of a security.
Binance and Binance.US have countered the SEC’s claims, pushing for the lawsuit’s dismissal. U.S. District Judge Amy Berman Jackson is reviewing their dismissal motion. The controversy mainly stems from the SEC’s “embodiment theory,” suggesting that these tokens represent more than digital assets; they are, in effect, investment contracts. This approach was highlighted in the SEC’s response to a motion in a case against Ripple, involving XRP holders.
Attorney John Deaton, representing XRP holders, criticized the SEC for lacking substantial case law to back its theory that cryptocurrencies traded in secondary markets are, by nature, investment contracts. This argument gains weight considering that federal judges in previous cases have stated that a token is not inherently a security.
SEC’s inconsistent arguments under scrutiny
The SEC’s approach has been called into question by media and legal experts, notably Fox Business journalist Eleanor Terrett and attorney John Deaton. They point out inconsistencies in the SEC’s arguments in different cases. In the Ripple and LBRY cases, the SEC described tokens as mere computer codes, which contradicts their current position in the Binance case. Furthermore, Terrett highlighted instances in the Ripple case where the judge deemed the SEC’s arguments inconsistent.
These contradictions fuel the debate over how the nature of a crypto asset might vary based on its trading context and classification as a security. The resolution of the Binance lawsuit, particularly regarding the SEC’s embodiment theory, is poised to have profound implications for the cryptocurrency industry. Affirming the SEC’s stance could lead to more stringent regulations and reclassifying certain digital assets as securities. Conversely, rejecting the SEC’s argument might bring greater clarity and potentially lenient regulation for the crypto sector.