The U.S. Securities and Exchange Commission (SEC) was denied permission to appeal a federal judge’s recent judgment regarding Ripple Labs, creating a major setback for the government in its efforts to regulate the cryptocurrency markets.
The sale of Ripple’s XRP digital token on public exchanges conformed with federal securities laws, according to U.S. District Judge Analisa Torres in Manhattan’s ruling on July 13 since buyers had no reasonable expectation of profit based on Ripple’s efforts.
United States banking regulators stepped up their enforcement of cryptocurrency laws in 2023. In the first part of the year, the SEC launched enforcement actions against Gemini, Genesis, Kraken, Beaxy, Bittrex, Binance, and most recently, Coinbase.
The Binance case is notable for a number of reasons. In addition to the harsh accusations of misusing customer funds and wash trading, the prevalence of tokens identified by the SEC as unregistered securities has also caused investors to pause.
Ten cryptocurrency assets were mentioned by the SEC as unregistered securities in its June lawsuit . Axie Infinity (AXS), Solana (SOL), Cardano (ADA), Polygon (MATIC), Cosmos (ATOM), The Sandbox (SAND), Decentraland (MANA), BNB (BNB), Binance USD (BUSD), and COTI (COTI) are on the list.
Numerous exchanges faced pressure to delist these assets due to the SEC’s classification as unregistered securities, akin to the situation with XRP in 2021. Businesses will need to choose between compliance and trading volumes following the SEC’s case against Binance.
The Howey Test, a legislative framework created in 1946, is at the centre of the SEC’s legal action. This test examines whether an investment meets the criteria for the term “security,” and it is called after the famous court case SEC vs. W.J. Howey Co.
It includes four essential elements: financial involvement in a group venture with an expectation of profit mostly from the labour of others.
The 19 tokens traded on Binance and Coinbase, according to the SEC, satisfy the requirements of the Howey Test. The cause is attributed to elements like the initial sales and fundraising activities, continuous development pledges, and the use of social media to promote the benefits and features of the protocols.
The SEC’s list comprises 65 cryptocurrencies, apart from the allegations against Binance and Coinbase. These tokens, designated as securities, are subject to specific rules and criteria, affecting over $100 billion in the crypto market, equivalent to about 10% of the total market capitalization.
Popular cryptocurrencies that the SEC has previously designated as securities include:
The trading volume of the three tokens Cardano (ADA), Solana (SOL), and Polygon (MATIC), as well as the other tokens classified as investment contracts by the SEC, has experienced a widespread rebound. The entire percentage of trading activity in the cryptocurrency market that these coins account for has increased by two percentage points to 13%.
The SEC indictment had a significant impact on these assets, erasing up to $20 billion from their aggregate market value. Even though these tokens’ prices haven’t really increased significantly since the unfavourable labelling, they have mostly retained a resiliency that suggests potential on all fronts.
According to reports , the trading volumes of these assets have not been significantly impacted by the delisting of these tokens on well-known brokerage platforms like Robinhood and eToro. The stated reasons are not unrelated to Judge Analisa Torres’ favourable XRP judgement, which highlighted that the coin is not an investment contract in and of itself.
Even while Judge Torres’ conclusions are complex, her decision that programmatic sales of XRP are unlawful raises the possibility that a similar conclusion might be drawn in the lawsuits against ADA, MATIC, and SOL in particular.
The three currencies were identified by Binance.US and Coinbase as unregistered securities together with Filecoin (FIL), Cosmos Hub (ATOM), The Sandbox (SAND), Decentraland (MANA), Algorand (ALGO), Axie Infinity (AXS), and COTI (COTI).
Following the legal action, the teams behind Cardano, Polygon, and Solana have all refuted the accusations made by the SEC. Any resolution will probably not be reached until the following years, as demonstrated by the SEC vs. Ripple case.
After the SEC sued Binance, the Israel-based investment platform eToro said that it will no longer permit U.S. consumers to buy four cryptocurrencies that are allegedly securities.
After the July 12 deadline, American clients will still be allowed to keep and trade the impacted coins—Algorand (ALGO), Decentraland (MANA), Dash (DASH), and Polygon (MATIC)—but not anymore buy them over the site, according to the company.
The investment site delisted the cryptocurrencies singled out by the SEC, following U.S.-based Robinhood. When Robinhood announced in June that it would stop supporting the Solana (SOL), Cardano (ADA), and Polygon tokens, it warned customers that any tokens still in their wallets beyond the company’s cutoff date at the end of June would be sold for market value.
eToro told CCCn the company has a framework in place which it regularly reviews the cryptoassets it offers in light of the rapidly evolving regulatory landscape.
“We remain a supporter of cryptoassets and believe in the importance of offering our users access to a diversified range of asset classes, which includes stocks, ETFs, and options. We are committed to working closely with regulators around the world to shape the future of the crypto industry and champion access for the ordinary investor,” eToro responded.
Robinhood did not immediately respond to a request for comment.
Paul Grewal, the chief legal officer at Coinbase, determined that “it’s time to relist” XRP once the decision on XRP was made public in July this year.
In its ongoing legal dispute with Coinbase, the (SEC) has adopted a resolute posture by reiterating its contention that some of the cryptocurrencies offered on the exchange meet the Howey Test’s definition of securities.
The SEC claimed that cryptocurrency asset issuers, including those with assets listed on Coinbase, urged investors to anticipate an increase in the value of their investments due to the issuer’s plans to create and preserve the asset’s value. This meets the requirements established by the Howey Test, which establishes whether an asset meets the definition of a security.
Furthermore, according to the SEC, Coinbase fully understood this classification and made mention of it in its presentations to the regulatory agency. This shows that Coinbase was aware that some of the cryptocurrencies it provided were securities and required SEC registration as such.