On June 7, U.S. regulators brought a high-stakes case against Coinbase and Binance, alleging that the crypto platforms violated securities laws by failing to register as an exchange, broker, and clearing agency. The determination of whether digital tokens qualify as securities will be central to this case.
The Securities and Exchange Commission (SEC) filed a lawsuit against Coinbase in Manhattan federal court, accusing the largest U.S. cryptocurrency platform of operating illegally and evading disclosure requirements. The SEC claims that Coinbase allowed trading of at least 13 crypto assets that should have been registered as securities, including Solana, Cardano, and Polygon. The regulator seeks financial penalties and a court order requiring Coinbase to comply with U.S. securities laws.
While some jurisdictions, like the European Union, have started to establish regulations for the crypto industry, the U.S. has taken the lead in regulatory actions. Over the past decade, the SEC has initiated more than a hundred enforcement actions, arguing that various cryptocurrencies are securities. However, the Coinbase case will serve as a significant test of the regulator's authority over the industry.
In addition to Coinbase, the SEC also sued Binance, alleging that the world's largest crypto exchange participated in an elaborate scheme to evade U.S. securities laws. Coinbase denies listing any securities, while Binance expressed disappointment with the case and intends to defend against the allegations.
Coinbase and other industry players have consistently asserted that most cryptocurrencies, operating on a blockchain network, do not meet the definition of securities under U.S. law. They have called for clearer regulations and guidance from the SEC, highlighting the regulator's vagueness and inconsistency in determining the securities classification of digital assets.
To support their argument that crypto assets are securities, the SEC relies on a 1946 U.S. Supreme Court case involving the W. J. Howey Co., which dealt with investors in Florida orange groves. The court defined an investment contract as "an investment of money in a common enterprise with profits to come solely from the efforts of others." Securities, unlike commodities, are subject to strict regulations and require detailed disclosures to inform investors about potential risks.
Many of the SEC's previous crypto-related cases have concluded with settlements, where companies paid fines and committed to complying with U.S. law. In some instances, this has led to exiting the U.S. market or discontinuing cryptocurrency projects. When cases have gone to court, judges have generally agreed with the SEC's argument that specific crypto assets qualify as securities. The courts considered developers' statements linking the value of the assets to the growth or maintenance of associated blockchain systems as evidence that investor profits relied on the efforts of others. The courts also determined that investors participated in a common enterprise as their funds were pooled by the token issuer to develop the relevant systems.
The SEC's case against Ripple Labs regarding XRP, currently the sixth-largest cryptocurrency globally, is expected to be the next significant case to be resolved. Ripple argues that there was no common enterprise since the blockchain associated with the cryptocurrency was fully operational before XRP was ever sold.
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