How the SEC’s revised lawsuit against Binance could impact crypto

How could the SEC’s revised lawsuit against Binance, which removes the requirement that tokens be considered securities, change the regulatory approach to digital assets?

The U.S. Securities and Exchange Commission has taken a new step in the legal process it has initiated against Binance and its subsidiaries.

A new court document dated July 30th shows that the SEC plans to request permission to review the case, specifically the sections dealing with ‘Third Party Crypto Asset Securities.’

This proposed change is significant because it indicates that the SEC is moving away from having to decide whether the tokens at issue in the Binance case qualify as securities.

The SEC first sparked widespread controversy by classifying around 68 tokens as securities in its June 2023 lawsuit.

The tokens in question include major players such as Solana (SOL), Cardano (ADA), Polygon (MATIC), Filecoin (FIL), Cosmos (ATOM), The Sandbox (SAND), Decentraland (MANA), Algorand (ALGO), Axie Infinity (AXS), and Coti (COTI).

The debate over third-party tokens intensified during the July 9 hearing after Judge Amy Berman Jackson’s June 28 ruling on a motion to dismiss filed by Binance was misunderstood by the defense as excluding third-party tokens from the case, a point the judge later corrected.

The document, dated July 30, was an obligatory joint statement clarifying both parties’ positions on the future conduct of the case, pending a judge’s decision on the involvement of third parties in the ongoing case.

Because details about the SEC’s future actions have not yet been released, the defense requested to view the amended complaint before proceeding with discovery.

So, what does this all mean for the crypto world? Let’s dig deeper and understand the implications of these latest actions by the SEC.

SEC’s changing stance

For years, the SEC has taken a firm stance that every cryptocurrency except Bitcoin (BTC) is a security. This means that the SEC believes that these digital assets are like stocks and require strict regulation and oversight.

This strict stance by the SEC has caused a huge rift in the crypto world, with many arguing that cryptocurrencies should be treated differently.

Amidst this, a critical shift occurred under strong political and external pressure. On July 23, the SEC finally gave the green light to identify Ethereum (ETH) ETFs and allowed them to go live.

This was a very important milestone because it basically meant that Ethereum was now treated as a commodity like Bitcoin.

Despite this newfound shift, the SEC’s approach in the Binance case has been surprising. Ripple (XRP) CEO Brad Garlinghouse called the SEC’s actions “hypocritical.”

Garlinghouse expressed his frustration in a tweet: “More evidence of SEC hypocrisy. Chairman Gensler states that the rules are clear, but the SEC has failed to figure them out and is haphazardly enforcing them, creating more confusion in the industry.”

More proof of the SEC’s hypocrisy.

Chairman Gensler says the rules are clear, but the SEC has failed to decipher them and is applying them haphazardly, creating more confusion in the industry.

A political agenda and/or bad faith litigation tactics. Definitely not “faithful adherence to the law.” https://t.co/iX8IdvaW92

— Brad Garlinghouse (@bgarlinghouse) July 30, 2024

This isn’t Garlinghouse’s first brush with the SEC. Ripple has been embroiled in a legal battle since the SEC filed a lawsuit in 2020 over allegations that Ripple raised money by selling XRP without registering it as a security.

The case between Ripple and the SEC is being closely watched as it could set a precedent for how cryptocurrencies may be regulated in the future.

Judge Analisa Torres ruled last July that XRP sales to retail investors on exchanges did not constitute investment contracts, a setback for the SEC’s jurisdiction.

Garlinghouse remains optimistic about a resolution and expects it to happen soon, but remains critical of the SEC’s approach.

Experts discuss

The SEC’s recent actions have sparked a range of reactions among experts and legal experts, with many believing that the SEC’s latest move in the Binance case is a strategic decision rather than a policy change.

Renowned attorney Jake Chervinsky suggests that the SEC’s decision not to seek discovery for several tokens in the Binance case is likely a litigation tactic.

There is no reason to think that the SEC has determined that SOL is not a security.

Their reluctance to conduct discovery on a dozen tokens in the Binance case appears to be a litigation tactic, not a policy change.

Note that the SEC still calls these tokens securities in other exchange cases.

— Jake Chervinsky (@jchervinsky) July 30, 2024

According to Chervinsky, the SEC still names these tokens as securities in other cases, suggesting that the latest move is specific to the Binance case and not a general policy change.

Meanwhile, Justin Slaughter, a former senior counsel at the SEC, believes people are exaggerating the SEC’s actions, noting that the SEC has not backed down from its position that tokens like Solana are securities.

Many people are reading too much into this filing. The SEC is not saying it will no longer take the position that Solana and other tokens are not securities, it is simply saying it will not try to prove that these tokens are securities in this Binance case. https://t.co/gJKSodERL7

— Justin Slaughter (@JBSDC) July 30, 2024

Meanwhile, John E. Deaton, a prominent attorney and Senate candidate, argues that the SEC’s actions are causing financial harm to retail investors.

This is further proof of that @GaryGensler he should resign immediately. @Fluctuation I had to file a lawsuit @SECGov and seek intervention to protect retail investors. In that case, I argued that Gensler and the SEC violated 76 years of established litigation… https://t.co/KqOl9PHZM4

— John E Deaton (@JohnEDeaton1) July 30, 2024

Deaton believes that the SEC’s latest move in the Binance case is evidence of strategic litigation tactics rather than an actual change in regulatory policy.

He also called for SEC Chairman Gary Gensler to resign, citing the damage caused by the SEC’s inconsistent enforcement.

Ripple’s chief legal officer Stuart Alderoty also noted the inconsistency in the SEC’s regulatory approach, noting that while the SEC has dropped claims that certain tokens on Binance are securities, it continues to pursue similar claims in other cases, such as against Coinbase.

When a judge calls BS on SEC’s claim that 10 Binance tokens are securities, SEC says “never mind.” But those tokens are being left out to dry in Coinbase’s case. That’s not how you regulate. https://t.co/xtfLdXWoO8

— Stuart Alderoty (@s_alderoty) July 30, 2024

Alderoty argues that these selective sanctions create confusion and undermine effective regulation.

Another industry expert, Adam Cochran, is critical of the SEC’s overall behavior, pointing to other cases where the SEC’s tactics have been questioned. He suggests that the SEC’s current approach is problematic and needs to be reevaluated.

1/21

The SEC’s lawsuit against DESO/Bitclout today is a great example of the dirty games the current SEC is playing and why any future administration needs to replace these companies. pic.twitter.com/eqEVg0Cwv0

— Adam Cochran (adamscochran.eth) (@adamscochran) July 30, 2024

What’s next?

As the November 2024 presidential election approaches, Republicans are using crypto as a shield against Democrats, creating a tense environment where the SEC’s regulatory actions are under intense scrutiny.

Tyler Winklevoss, co-founder of crypto exchange Gemini, recently expressed gratitude to former President Donald Trump for what he perceived as a shift in the SEC’s stance toward Binance, though there is no concrete evidence that Trump directly influenced that change.

Meanwhile, Trump spoke at the Bitcoin Conference held in Nashville from July 25-27, announcing his plans to fill the shoes of current SEC chairman Gary Gensler.

Trump’s sudden announcement was met with enthusiastic applause, reflecting the crypto community’s disappointment with the SEC’s approach.

The SEC has been criticized over the years for targeting crypto companies and failing to provide the transparency and clarity needed for the industry to grow amid regulatory challenges.

Collective frustration with the SEC and Gensler has thus created a unique situation where crypto advocates and Republican leaders have united in criticizing the SEC and, by implication, Democrats.

As elections approach, this scenario sets the stage for possible changes in how the industry is regulated depending on the election results.