• Coinbase and Binance are facing lawsuits from the SEC.

• Coinbase has not initiated any actions, whereas Binance has already delisted trading pairs from its platform.

The Securities and Exchange Commission (SEC) is taking decisive action, demonstrating its increased seriousness. The regulatory body in the United States has initiated legal proceedings against two prominent cryptocurrency exchanges. Those held accountable could be subjected to substantial penalties and potentially even imprisonment.

 Not only are the exchanges under scrutiny, but the regulator is also focusing on multiple coins and tokens. Is there a possibility that a wide array of cryptocurrencies might face the risk of being removed from the market? Coinbase and Binance are facing lawsuits from the SEC, which explicitly identifies several coins that the regulatory body considers securities according to the Securities Act of 1943.

If this classification is accurate, cryptocurrency exchanges should have obtained licenses to facilitate trading in securities. However, neither Coinbase nor Binance possesses such licenses, posing a significant challenge. The SEC has identified SOL, ADA, MATIC, FIL, SAND, AXS, CHZ, FLOW, ICP, NEAR, VGX, DASH, NEXO, ATOM, ALGO, and COTI as assets classified as securities.

None of the cryptocurrencies mentioned are Proof of Work (PoW) coins. Instead, they utilize alternative consensus mechanisms and most rely on Proof of Stake (PoS). This aligns with the SEC’s approach, as the agency classifies both Coinbase and Binance as unauthorized securities services due to their staking-as-a-service offerings.

The Application of the Howey Test in the Cryptocurrency Sphere

The foundation of the SEC’s legal action centers around the Howey Test, an established legal framework dating back to 1946. Named after the pivotal SEC vs. W.J. Howey Co. case, this test determines the classification of an investment as a “security.”

The Howey Test consists of four essential elements: an investment of money, involvement in a common enterprise, and anticipation of profits primarily from the efforts of others. According to the SEC, the 19 tokens traded on Binance and Coinbase satisfy the criteria of the Howey Test. This is due to various factors, including initial sales and fundraising activities, ongoing commitments to development, and the utilization of social media to promote the protocols’ features and benefits.

However, critics contend that employing this test, which originated in a time predating cryptocurrencies, to digital assets is insufficient and may result in excessively stringent regulatory consequences.

What Does This Mean For The Market?

The uncertainty surrounding the legal status of crypto assets undeniably undermines confidence among US investors, which is evident in the price charts. Solana, for instance, has experienced a 9 percent decline since the SEC’s actions.

Binance Coin (BNB) has faced even more significant setbacks, with the native token of the Binance Smart Chain losing 13 percent of its value following the negative developments in Washington. It is not surprising considering that the SEC categorizes BNB as security and has dedicated special attention to the token, as evidenced by its mention 153 times in the SEC document.

Coinbase has not initiated any actions, whereas Binance has already delisted trading pairs from its platform. Additional US trading platforms are also becoming hesitant. During a hearing before the US Congress on June 6, representatives from the investment app Robinhood stated they would reassess specific coins available on their platform. 

Delisting coins is unfavorable from investors’ perspective as it eventually hampers the flow of capital and the liquidity of the asset.