The SEC unilaterally declared certain crypto assets securities in several unrelated cases over the past few months. Some industry players say that the SEC doesn’t know enough about the tokens to be able to claim this.
The SEC has listed twelve additional crypto-tokens in its complaint against Coinbase for violating securities laws.
SEC filed a lawsuit against Coinbase one day after Binance was charged with similar offenses. The suit focuses on allegations that Coinbase operated an unregistered broker service and facilitated the trading of securities without registration.
The SEC has claimed that these tokens, ADA, CHZ and SOL are securities in the Coinbase suit.
Coinbase did not remove any of these assets as of publication.
In a complaint filed against Binance, the SEC asserts that 10 tokens — separate from BNB, BUSD, and other native BNB tokens on the exchange — are securities. SOL, ADA, MATIC, FIL, ATOM, SAND, MANA, ALGO, AXS, and COTI are the tokens that were listed.
It is nothing new for the SEC to include tokens as securities in exchange litigation. The SEC’s listing of nine tokens in its lawsuit filed against an ex-Coinbase employee on July 20, 2022 for insider trading and settled May 20, 2023 listed them as securities.
The nine tokens that are being delisted by Coinbase include: RLY (Rally’s governance token), DDX (XYO), LCX (POWR), RGT and KROM. Coinbase delisted two tokens, Rally’s RLY token and RGT token.
Bessie liu, News analyst
Crypto tokens are not understood by the SEC
The SEC has been declaring crypto assets securities — a designation that brings tokens into the same US regulatory fold as stocks and bonds.
However, the reasoning of regulators is opaque. In some instances, the regulator’s reasoning is erroneous. SEC’s Monday lawsuit against Binance demonstrated that there were significant inaccuracies behind the SEC’s decision.
All of this shows that SEC lacks a basic understanding about the relationships between tokens and protocol.
As an example, SEC claims that it has a claim to the “New Tendermint” The ATOM token is an important contributor.
“That’s not true, just because someone has made a website and claims they contribute to Cosmos, doesn’t mean they contribute to Cosmos,” Zaki Manian is the cofounder and protocol of Sommelier Finance in the Cosmos eco-system. He spoke to Blockworks Tuesday.
A second example: the SEC claims that Interchain Foundation has sold ATOM tokens since 2017.
The Cosmos Hub, the issuer of the ATOM token, launched in March 2019, and ATOM tokens were not transferable at launch — meaning they could not be bought or sold. Transfers were not enabled until April 2019 after a “hard fork”.
“There’s a lot of history to the Cosmos approach to compliance, what you see from the SEC is a very superficial and largely inaccurate characterization of blockchain networks,” Manian stated.
Manian claims that the ATOM token does not satisfy the SEC standard for a security as defined by the Howey Test, since the original entity behind the project collapsed.
Investors can expect growth to be a characteristic of Howey tests. “derived from the efforts of others.” There is also an expectation of profit under Howey — often from the security’s originators.
ATOM was no exception. A large number of its contributors were developers as well. The developers and investors of ATOM were often one in the same.
“In the history of Cosmos we recruited as many of the people who had been in the fundraiser as possible, to work, to run nodes and testnets and help build the project, build infrastructure during the launch of every step of way,” Manian said.
‘Deflationary model’ token test incorrectly applied
SOL, MATIC and other tokens have been designated securities by the SEC, in part due to their intrinsic value. “deflationary model.”
SEC wrote about SOL. “this marketed burning of SOL as part of the Solana network’s ‘deflationary mechanism’ has led investors to reasonably view their purchase of SOL as having the potential for profit to the extent there is a built-in mechanism to decrease the supply and therefore increase the price of SOL.”
However, in the article cited by the SEC to support their claim, the author, Anatoly Yakovenko, clearly states that SOL ‘transaction fees’ are burned, a distinction the SEC overlooks but that is critical to the operation of the blockchain, and which is described in more detail below.
In its documents, the Solana Foundation states that their token is inflationary. SOL has been an inflationary asset for years.
SEC made comparisons with Polygon MATIC token. Polygon, according to the regulator, has also promoted that token. “burns” MATIC tokens accumulate as fees, which indicates that MATIC’s total supply will decrease.”
But the SEC fails to understand something critical to the way blockchains work.
These “Models of deflation” use a similar price modulation technique to Ethereum’s EIP-1559 — a fee-burning mechanism intended to minimize congestion. It’s designed to prevent block builders from manipulating fees in a bid to extract more from protocol users.
Polygon’s MATIC, in particular, is designed almost as a copy-paste from Ethereum.
“EIP-1559 will be an issue for Ethereum as well, because the two work in exactly the same manner.” Matt Cutler, co-founder and CEO of Web3 infrastructure company Blocknative, told Blockworks.
ETH gas fees…
Prior to EIP-1559, gas fees on Ethereum were purely market-based, meaning that everyone paid a gas fee associated with their transaction and whoever paid the most had their transaction included in the blockspace, a situation that created many negative externalities, Cutler said.
“Two bots trading could negatively affect the gas prices of the whole network.” he explained.
This in turn made gas prices unpredictable and raised concerns about the idea that privileged actors were able to influence the prices.
EIP-1559 was designed to introduce a base fee — which meant that for your transaction to be included on chain, you must pay the fee.
A base fee is set by the network and must be paid in the network’s native token — so in the case of Polygon, the fee would be paid in MATIC.
“The basic idea behind this is to modulate issuance.” Cutler said.
It is important to note that in the case of ETH, EIP-1559 does not make the asset itself deflationary as it is dependent on marketplace demand. Although it does reduce supply, the rate of issuance of ETH continues to increase, Cutler notes.
Although one could argue that MATIC’s fixed supply could imply that the token has a “Deflationary effects” its reason for burning tokens is much more complex.
“[The SEC] Takes a small piece out of an extremely large topic, and declares it a problem without considering all other benefits and reasons for the decision. It is important to note that EIP-1559 exists for more than just price increases. This is an improved mechanism that’s more efficient, more fair, and easier to use than the one before.” Cutler said.
President of Polygon Labs Ryan Wyatt will also be sharing testimony in Washington, DC, today.
“Wyatt explained that she would “discuss the crucial role Web3 infrastructure plays in ensuring user privacy and protecting them, as well as sharing positive use-cases.”
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