Over the past week, the cryptocurrency market experienced a significant shakeup as several altcoins faced heavy losses. While Bitcoin only saw a modest 3% decline, some other large-cap cryptos, such as BNB, ADA, MATIC, and SOL, plummeted by between 20% and 25%. This uncharacteristic divergence from Bitcoin's performance is the direct result of last week’s actions taken by the US Securities and Exchange Commission (SEC) against two major cryptocurrency exchanges, Binance and Coinbase. In this article, we will delve into the implications of these lawsuits and explore why certain coins are being affected while others were spared.
SEC Lawsuits Against Binance and Coinbase
The SEC has launched separate lawsuits against Binance and Coinbase, accusing both exchanges of enabling US investors to trade unregistered securities. Although the specifics of the accusations against each of the two exchanges differ, the essence of both cases revolves around the alleged violation of securities laws. The SEC identified around 20 cryptocurrencies, including BNB, BUSD, SOL, ADA, and MATIC, as falling under the definition of "security.", and then promptly sued Binance and Coinbase.
Exempted Cryptocurrencies: Bitcoin and Ethereum
Interestingly, the SEC chose not to label Bitcoin or Ethereum as securities in these lawsuits. This decision has sparked speculation among market observers. One possible explanation is that in 2018, the SEC explicitly declared Bitcoin and Ethereum as non-securities. It is likely that the regulatory body doesn’t want to look like a flip-flop, although when it comes to crypto, the SEC has always been the epitome of inconsistency. Thus, BTC and ETH have been spared the security title due to this earlier explicit ruling.
Uncertainty Surrounding Classification Criteria
While Bitcoin and Ethereum have been exempted, the SEC's actions against other cryptocurrencies raise questions about the criteria used to determine whether a cryptocurrency is a security. Some argue that Bitcoin's and Ethereum's decentralised nature, as well as Bitcoin's proof-of-work consensus mechanism, played a role in their exclusion from the securities classification. However, this argument falls short, as many of the newly declared securities, such as MATIC, SOL, and ADA, are also decentralised. The proof-of-stake mechanism is also not at fault, as Ethereum is now using precisely this transaction validation model.
The reality is that the SEC lacks clearly defined criteria to classify some cryptocurrencies as securities while others as non-securities. To avoid undermining its previous declarations, the regulatory body chose not to include Bitcoin and Ethereum in the lawsuits.
Implications for the Future
The outcome of the legal battle between Binance/Coinbase, and the SEC will have far-reaching implications for the cryptocurrency landscape, both in the US and globally. How the exchanges come out of this legal challenge and the subsequent regulatory actions that may follow will shape the future of cryptocurrency trading for years to come. At the end of the day, we are talking about the two largest exchanges in the world.
More importantly, while many analysts have concentrated on which coins were classified as securities and which ones were not, there could be serious implications for any cryptocurrency out there, including BTC and ETH. The fact that these cryptos were not classified as securities doesn’t make the job of the Binance and Coinbase defense teams any easier.
The lawsuits are nothing but a strong move by the SEC to finally regulate crypto exchanges, platforms where the vast majority of cryptocurrency trading occurs. Stay tuned for the latest on this possibly most topical development of the year for crypto investors.