Why Did SEC List Only Some Cryptos as Securities? Will There Be an Impact on Their Market Value?

A couple of days before, the SEC charged Coinbase with operating their trading platform as an unregistered national security, exchange, broker, and clearing agency. This was followed a day after the authorities sued Binance and its CEO, Changpang Zhao, on similar charges. This resulted in the US branch of Binance halting the OTC, or Over-the-counter, desk and also eliminating over forty trading pairs, the majority of them being against USDT. 

In the lawsuit against Coinbase, the SEC listed nearly 13 cryptos that it believes to be secure, and with the Binance lawsuit, 10 cryptos were added to the list. Previously, when Terraform Labs was charged with fraud, 16 cryptos were labeled as securities. Therefore, including all other lists, the crypto list classified as ‘securities’ now holds over 65 assets, affecting over $100 billion in market cap. 

Among the 25,000 cryptos in the market, why did the SEC charge only these many tokens? What is common between them? A popular analyst, Miles Deutscher, explained the entire scenario in a series of threads and believes that regulatory clarity is the need of the hour to prevent the ‘bumpy ride’ of the cryptos. 

In the time when the SEC’s lawsuit with Ripple over XRP is going on, the authorities have tightened their grip on the centralized exchanges. This comes in the wake of fallouts of the popular exchanges in recent times, incurring heavy losses among the market participants. However, the analyst here believes, that the SEC listed these tokens because, 

• There was an initial sale or fundraising event
• Each project pledged to improve the protocol via ongoing development that included marketing or development expenses
• Social media was utilized to express the protocol’s features and advantages. 

This is when the ‘Howey test’ came into play, which carries four main criteria to determine whether the asset is a security or not. Firstly, it is an investment of money, secondly, it is in a common enterprise, thirdly, the trade carries an expectation of profit; and lastly, it is derived from the efforts of others. 

The SEC argues that the above-mentioned tokens satisfy all the above criteria. Interestingly, Ethereum still remains out of this list despite it also holds good for the above conditions. Therefore, if these tokens are considered securities, then the impact on them could be hazardous. These tokens may not be allowed to trade in the US and may also be delisted from the exchanges, much like XRP, which may create regulatory challenges and set an ‘alarming precedent’. 

The important thing to be noted here is that the ‘Howey test’ was created in 1946 and is outdated for the new digital asset class. Therefore, the analyst believes that regulatory clarity and clear guidance as to how crypto fits into the financial system are very important. Hence, this may prevent the ‘bumpy ride’ within the markets and bring some consistency.