Dear Friends,
With the long developing over Binance, The The Securities and Exchange Commission (SEC) finally came out with allegations over Binance now in US- which is the talk of the town everywhere in the Crypto markets worldwide.
As SEC has to safeguard the interest of the investors and to check the US laws, in various times, it appeared that there were no clarity from SEC end. There were times that it had given permission to go for IPO, later it came out with actions against the security instruments in a point of wonder.
But there were various other opinions on this serious issue.
Let’s get deeper into this.
The determination of whether digital tokens qualify as securities will be the focal point of a significant legal case involving US regulators. The case alleges that cryptocurrency platforms Coinbase and Binance violated the law by failing to register as securities exchanges, brokers, and clearing agencies.
What actually are the allegations?
The SEC filed a lawsuit against Coinbase in Manhattan federal court, accusing the largest US cryptocurrency platform of operating illegally and evading disclosure requirements.
According to the SEC, Coinbase permitted users to trade at least 13 crypto assets that should have been registered as securities. These assets include tokens like Solana, Cardano, and Polygon. The regulatory agency is seeking financial penalties and requesting a court order for Coinbase to comply with US securities law.
While other entities, such as the European Union, have started formulating regulations for the crypto industry, the United States has taken the lead in regulatory actions. The SEC has initiated over a hundred enforcement actions in the past decade, asserting that various cryptocurrencies qualify as securities.
However, the Coinbase case will present the most significant test thus far regarding the regulator's authority over the industry. In addition to the lawsuit against Coinbase, the SEC has also sued Binance, alleging that the world's largest crypto exchange engaged in an elaborate scheme to evade US federal securities laws.
Coinbase denies listing any securities, while Binance has expressed disappointment with the case and intends to defend against the allegations. Coinbase and other industry participants have consistently argued that most cryptocurrencies, which operate on a blockchain network, do not meet the definition of securities under US law. They have called for clearer regulations and guidelines from the SEC, criticizing the agency for being vague and inconsistent in determining the securities status of digital assets and offering little assistance to market participants seeking guidance.
How does US law define a 'security'?
To argue that crypto assets qualify as securities, the SEC relies on a 1946 US Supreme Court case involving investors in Florida orange groves owned by the W. J. Howey Co. The court concluded that an "investment of money in a common enterprise with profits to come solely from the efforts of others" constitutes an investment contract, which falls under the definition of a security.
The court determined that the SEC had jurisdiction to prevent Howey from selling fractional land interests, accompanied by a contract promising profits from the harvest, to out-of-state investors. Securities, unlike other assets such as commodities, are subject to strict regulation and require comprehensive disclosures to inform investors about potential risks.
Is a crypto asset is a security?
Many of the SEC's crypto-related cases have been resolved through settlements so far, with companies paying fines and committing to abide by US law. In some instances, this has resulted in companies exiting the US market or discontinuing cryptocurrency projects.
In the few cases that have been litigated, courts have agreed with the SEC's argument that certain crypto assets qualify as securities. The court rulings emphasized that the value of these digital assets was tied to the efforts made to develop or sustain the associated blockchain systems, thereby demonstrating that investor profits depended on the "efforts of others." Additionally, courts found that investors in these assets participated in a "common enterprise" since their funds were pooled by the token issuer and utilized to develop the relevant systems.
The SEC's ongoing case against Ripple Labs concerning XRP, the world's sixth-largest cryptocurrency, is expected to be the next significant case to be decided. Ripple has contended that there was no common enterprise since the associated blockchain was fully operational before XRP was ever sold.
How about BTC then?
Bitcoin is not classified as a security due to its anonymous and open-source origins, which mean investor profits are not reliant on the efforts of developers or managers, according to Carol Goforth, a law professor at the University of Arkansas.
Some blockchain projects have attempted a two-stage funding approach, offering securities under SEC regulations and subsequently distributing or selling cryptocurrency to those investors once a functional blockchain has been established. Developers hoped that this approach would eliminate the "common enterprise" element. However, the SEC has not provided clarity on what would be required to convert a security into a non-security.
How will the Coinbase case can progress?
Following the filing of the lawsuit, Coinbase CEO Brian Armstrong expressed on Twitter that the company is "proud to represent the industry in court to finally get some clarity around crypto rules." However, a ruling on the central issue may take several years.
The Ripple case, which involves just one cryptocurrency, has already taken two and a half years to reach a point where a ruling is possible. In the Coinbase case, the SEC alleges that 13 different digital assets sold on the platform qualify as securities.
So, with the above we would come to a conclusion that this will not be a big event as far as Binance in concern as well as the investor community.
The Final thought
Infact the current SEC chair Gensler was offered to work as a advisor in Binance many years back.
To me personally speaking, unlike FTX- Binance has much reserves and they periodically show case this for better transparency. As a world leader of Crypto Exchange, the portion of the business in US is very small for Binance. As SEC tries to lock all the assets of Binance, this would go to the court trial. This will take more time as we see the XRP case. If SEC wins, Binance may shut their US operations or Binance needs to pay a penalty to continue their operations.
