The US Securities and Exchange Commission (SEC) has dumped the term "crypto-asset securities", acknowledging a significant mis-step in their use of the phrase over a number of years. The admission, disclosed in an amended complaint against Binance on 12 September 2024, marks an important shift in language away from the regulator's oft repeated stance that crypto-assets are somehow, and without further details of any kind ever being provided, inherently securities under US law.
The SEC clarified that the phrase “crypto asset securities” was not intended as an outright classification but was used as a 'shorthand', a decision they now 'regret due to the confusion it caused'. This acknowledgment is a rare instance of the SEC conceding to criticism that it has overreached.
The SEC's memorandum filed in support of the amended complaint sets out the SEC's concession:
Despite the concession, the SEC has not backed down from its stance that the ten crypto-assets implicated in the Binance case were sold as securities when trading took place in secondary markets on the exchange. It is still unclear, due to the absence of any guidance from the SEC, when a crypto-asset is sold as a security or not.
At a Congressional hearing on the SEC's approach to crypto, in September 2023 Rep. Ritchies Torres (D-NY) famously followed up a question about whether an investment contract (which is considered a security under US law) required a contract:
I [did] not go to MIT, but in the Bronx, if I ask whether any investment contract includes a contract, the answer is typically yes or no,
He also famously asked Mr Gensler if buying a Pokemon card was purchasing a security, to which Mr Gensler said "No", but when asked if buying a Pokemon card on a digital exchange was a security Mr Gensler said "I'd have to know more."
The timing of the SEC's concession is particularly interesting, coming amid ongoing legal battles between the SEC and major players in the crypto world, including MetaMask and Coinbase. The notion that crypto-assets are inherently securities has come under increasing scrutiny by the Courts, including in the Ripple case where the New York court found that programmatic sales of the XRP token on exchanges were not securities transactions.
The SEC now appears to concede that its attempt to apply a blanket label to all crypto-assets as securities and create definitions without a proper logical basis for doing so must yield to the importance of clear definitions and rigorous legal analysis. While the concession is significant, it remains to be seen whether it will have any material impact on the SEC's litigation strategy going forward with the SEC continuing to pursue a wide array of actions against centralised and decentralised platforms on the basis that they operated as unregistered broker dealers and exchanges (analogous to the New York Stock Exchange) by offering trading in crypto-assets.
By Steven Pettigrove, Michael Bacina and Luke Misthos
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