Legal Experts React to SEC’s Regret Over Confusion from Dubbing Tokens as Securities

Highlights:

• The SEC retracted its “crypto asset securities” term, aiming for clarity.
• The agency maintains that Binance and Kraken still face securities charges.
• Industry leaders criticize the SEC’s inconsistent approach and call for transparency.

In a footnote from a Sept. 12 court filing, the SEC retracted its previous stance on cryptocurrencies being “securities” and plans to use more precise language moving forward. This retraction is part of the SEC’s ongoing lawsuit against crypto exchange Binance for allegedly offering and selling unregistered securities. In a 2023 complaint, the SEC labeled 10 crypto assets on the Binance platform, including Solana, Cardano (ADA), and Polygon, as “securities.”

SEC Regrets “Crypto Asset Securities” Term, Still Pursues Binance

The SEC has expressed regret for any confusion caused by referring to these tokens as securities and no longer uses this term. The agency clarified that its previous use of the term did not imply that the tokens themselves are securities. Instead, the designation of a token as a security involves the complete set of contracts, expectations, and understandings related to its sale and distribution, as noted in earlier filings. 

Under this more specific definition, the SEC maintains that Binance is still at fault for illegal securities offerings because its tokens “continue to be offered and sold as investment contracts.” The securities regulator is pursuing a similar argument against crypto exchange Kraken, which was charged in November with “operating a crypto trading platform as an unregistered securities exchange, broker, dealer, and clearing agency.”

Crypto Industry Criticizes SEC’s Shifting Stance on Digital Assets

Many in the crypto industry have reacted negatively to this nuanced shift. Critics argue that the SEC’s past actions, such as its pursuit of Ripple and its classification of XRP as a “digital asset security,” are inconsistent with the agency’s latest statements.

Coinbase’s Chief Legal Officer Paul Grewal pointed out the inconsistency in a social media post. He noted that the SEC’s amended complaint against Binance acknowledges the confusion caused by the term “crypto asset securities.” He questioned the SEC’s prior regulatory approach, alleging that the agency misled both the courts and the public through its enforcement actions. 

Grewal also commented on the SEC’s handling of Ethereum (ETH) transactions, pointing out the agency’s lack of clarity on how ETH transactions differ significantly from other scrutinized digital assets.

He remarked:

“Somehow ETH transactions have changed in a meaningful way that the Ten Crypto Assets have not so as to avoid the agency’s clutches. How? That’s apparently for the SEC to know, and the rest of us to find out only if and when we are sued.”

"The SEC regrets any confusion it may have invited" by falsely and repeatedly stating that tokens themselves are securities. This is the remarkable representation in Footnote 6 of @SECGov's Amended Complaint against Binance. I hope @s_alderoty is getting some good sleep tonight.… pic.twitter.com/PpbprvkGxh

— paulgrewal.eth (@iampaulgrewal) September 13, 2024

Stuart Alderoty, Chief Legal Officer at Ripple, also criticized the SEC’s shift in stance. He highlighted that the SEC’s acknowledgement effectively confirms that “crypto asset security” is a fabricated term. He also noted that proving tokens as securities now involves showing a collection of “contracts, expectations, and understandings.” Moreover, Alderoty compared the SEC’s actions to a “twisted pretzel of contradictions” and urged for greater transparency and consistency in the agency’s definition and regulation of digital assets.

So the SEC finally admits that 1/ "crypto asset security" is a made up term and 2/ to prove a "crypto asset security" is an investment contract, the SEC needs evidence of a bundle of "contracts, expectations, and understandings"?

Think it's time for @SECgov to admit it has… https://t.co/iJIYTnNvxs pic.twitter.com/E58Pft7irc

— Stuart Alderoty (@s_alderoty) September 13, 2024