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Why the SEC’s latest decision may not mean it’s dropping the case against third-party tokens like SOL
The SEC has said in a new filing in its case against Binance that it intends to drop its claims that “third-party tokens” should be considered unregistered securities. But how significant is the SEC’s apparent change of heart?
The SEC intends to amend its complaint in the Binance case to drop allegations that third-party tokens are unregistered securities.
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Published on July 31, 2024 at 7:54 AM EST.
On Tuesday morning, the SEC released a archiving in its case against cryptocurrency exchange Binance that some have interpreted as a major shift in the agency’s view of cryptocurrencies other than bitcoin and ether. Specifically, the filing said the SEC intended to amend its complaint to drop allegations that these so-called third-party tokens, including Solana’s SOL and Polygon’s MATIC, constitute unregistered securities. The SEC, which has already informed Binance of its plans, wrote that this move “[obviated] the need for the Court to issue a ruling on the sufficiency of the allegations relating to these elements at this time.”
The SEC has made this charge against multiple cryptocurrencies in other cases it has filed against cryptocurrency exchanges like Coinbase and Kraken, making Tuesday’s pivot in the Binance case potentially very significant. But some experts are skeptical that the filing reflects a broad shift in the SEC’s stance.
“There’s no reason to believe the SEC has decided that SOL is not a security,” said Jake Chervinsky, chief legal officer at crypto VC Variant Fund. he wrote on X Tuesday. “That [the SEC doesn’t] “We want to investigate a dozen tokens in the Binance case and it appears to be a litigation tactic, not a policy change.”
Chervinsky further noted in his post that the SEC continues to call these tokens securities in other cases against cryptocurrency exchanges.
Miles Jennings, General Counsel for a16z crypto, he wrote on X that, compared to Judge Katherine Polk Failla, who presides over the SEC case against Coinbase, the judge in the Binance case, Amy Berman Jackson, had set a higher bar for determining whether these third-party tokens meet the Howey test. The Howey test is a set of four criteria, essentially that there is an investment of money in a joint venture with the expectation of profits from the efforts of others, that must be met for an asset to be considered a security and therefore subject to U.S. securities laws.
On a June 28th opinion Regarding Binance’s motion to dismiss the SEC’s case, Judge Jackson criticized the SEC’s regulation of the cryptocurrency industry through litigation and stated that “the Court will apply the sole test offered by the government to assess whether a nontraditional asset is a security and finds that the complaint does not include sufficient facts to support a plausible inference that any secondary sale satisfies the Howey test for an investment contract.”
According to Jennings, the SEC’s decision to exclude third-party tokens from its complaint against Binance was made to avoid having to prove to a judge the allegations that such tokens are securities.
“The SEC has decided to abandon its far-reaching legal theories in the face of a skeptical judge (Jackson), but will continue to pursue those claims in the face of a judge who is inclined to agree with them (Failla),” Jennings wrote.
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Similarly, JW Verret, a crypto law professor at George Mason Law School, called the SEC’s move “a tactical retreat” by the SEC.
The key to assessing the impact of the change could be whether the SEC similarly modifies its claims in its cases against Coinbase and other cryptocurrency exchanges. If it doesn’t, it would seriously damage the agency’s credibility, according to Verret.
“If the SEC continues to pursue those charges in the Coinbase case but not Binance, it will be judge shopping at its worst,” Verret told Unchained. “Trying these cases differently to see what sticks would go against everything the SEC stands for, and I think Judge Failla will see that.”
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Verret noted that if the SEC does not amend its complaint against Coinbase, “Coinbase will certainly raise this inconsistency in its case.”
The 10 tokens cited in the SEC’s original complaint against Binance as unregistered securities were SOL, ADA, MATIC, FIL, ATOM, SAND, MANA, ALGO, AXS, and COTI.
In a July 9 hearing, Binance argued that Judge Jackson’s June 28 opinion implied that third-party tokens would be excluded from the SEC’s case, a claim Judge Jackson disputed.
The SEC’s Tuesday filing was therefore intended to clarify the agency’s position.
In a sign that investors may not have viewed the SEC filing as a ramification for SOL, the token did not immediately rally following news of the filing on Tuesday. However, it was up about 1% over the past 24 hours as of Wednesday morning, while MATIC is down just over 1% over the same time frame, according to CoinGecko.