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Security Token Classification Expands in SEC Lawsuits
June 16, 2023
The US Securities and Exchange Commission (SEC) currently has lawsuits against the crypto exchanges of Binance and Coinbase, having levied allegations of regulation violations, illegal activity and other charges. As part of this, the SEC has recently labeled a number of crypto tokens as securities which would bring them under the SEC jurisdiction and require tighter regulation of the assets and their trading through compliance with existing securities regulations which some crypto businesses say is not suited to blockchain and crypto.
As opposed to a commodity, a security is a representation of tradable financial assets, e.g. shares. In the US, the decision to label something as a security is based on the Howey test, which defines an asset as a security if:
- You invest money into it (buy it).
- You expect a return on that investment (you profit)
- The investment is in a common enterprise (there’s a group of investors).
- Your profit comes from others’ work (you don’t do anything beyond investing).
Securities have tighter regulations than commodities so most crypto and exchanges would prefer for the tokens and assets to be classified as commodities. The SEC disagrees with the stance (though its chairman Gary Gensler has made contradictory statements in the past).
The latest slew of crypto earmarked as securities by the SEC in the lawsuits comprises of:
- Cosmos (ATOM)
- Binance Coin (BNB)
- Binance USD (BUSD)
- COTI (COTI)
- Chiliz (CHZ)
- Near (NEAR)
- Flow (FLOW)
- Internet Computer (ICP)
- Voyager Token (VGX)
- Dash (DASH)
- Nexo (NEXO)
- Solana (SOL)
- Cardano (ADA)
- Polygon (MATIC)
- Filecoin (FIL)
- The Sandbox (SAND)
- Decentraland (MANA)
- Algorand (ALGO)
- Axie Infinity (AXS)
These tokens join a larger list that the SEC has previously ruled securities, though many are voicing their opposition to the decision and others are turning to other jurisdictions where they find clearer standards.
Despite the negative reactions of some, there are upsides to cryptos being deemed securities; an increase in regulation would come alongside a corresponding boost to legitimacy and, with better protections for investors, potentially more widespread adoption, with the development and innovation that comes with that. Additionally, tighter standards for exchanges and the like will improve consumer protections, hopefully avoiding some of the scandals that have shaken the crypto world over the past year.
Regardless of the views on regulation, it is undeniable that it is increasingly being brought to the blockchain ecosystem and, whilst many may regret the additional burden it places on them, Blockpass is able to provide a solution - particularly for security tokens - which makes compliance as frictionless and painless as possible. In fact, Blockpass has been operating towards this end for years. Blockpass meets and adapts to existing and emerging regulatory standards and does so in a way that protects users’ privacy and, through a unique reusable KYC model, enables instantaneous onboarding of customers with their Blockpass profile.
The Blockpass platform is fully automated and hosted in the cloud, with no integration or setup fee. Businesses can sign up to the KYC Connect console in a matter of minutes, test out the service, and start conducting identity documents verification, KYC and AML checks. Take a look at Blockpass' groundbreaking crypto compliance solutions:
KYC CONNECT®
- Built-for-Crypto, centralized off-chain KYC platform
- Bank-grade KYC/AML
- No integration necessary, no setup cost
- Self-service and managed SaaS plans
ON-CHAIN KYC®
- On-chain, zero-knowledge verification KYC platform
- Customers complete KYC in an anonymous, data-free way
- Verification results delivered by API KYC / ID data oracle across multiple blockchains
UNHOSTED WALLET KYC™
- Only KYC solution for unhosted (or non-custodial) wallets in the market
- Adheres to the Crypto Travel Rule laws being adopted, reduces regulatory risk of transactions
- Verifies users own/control their crypto addresses
By Matthew Warner