The United States Securities and Exchange Commission (SEC) is once again facing backlash from the crypto community after it tried to provide clarification for how it has treated crypto assets in past legal cases.

On September 12, an amended complaint against Binance the agency included a footnote where it said it “regrets” causing confusion about the term “crypto assets securities” as it used it too lightly as a shorthand for the entire set of contracts offered to investors by companies in the space that were considered unregistered securities offerings.

The agency emphasized that “to avoid any confusion, the PAC no longer uses the shorthand term, and the SEC regrets any confusion it may have invited in this regard.”

sec regrets using the term crypto asset securities as it caused confusion

This statement marks a significant shift in the SEC’s views concerning digital assets as it means that it will no longer treat individual tokens as securities but rather “the full set of contracts, expectations, and understandings centered on the sales and distribution of the [crypto asset].”

The distinction suggests that the agency will take a more cautious approach to classifying digital assets, possibly focusing more on how these tokens are distributed rather than questioning their nature.

These remarks were part of an ongoing legal proceeding against Binance that started in 2023 where the SEC identified that 10 cryptocurrencies were offered as “securities.” The list includes the native tokens of popular blockchains like Solana.

Is the SEC Finally Dropping the Howey Test as a Tool to Regulate Crypto Assets?

The SEC has commonly used the so-called Howey Test to determine which assets qualify as securities or investment contracts. This methodology was established by the Supreme Court in a 1946 decision.

In November last year, the agency said that these 10 assets offered by Binance met the criteria of the Howey Test and should be treated as securities. However, the agency’s latest comments may indicate that they could no longer rely on that assessment to substantiate their cases.

Industry professionals and crypto exchanges have opposed the view as they believe that cryptos should be treated more as commodities due to their complex and unique design.

In July this year, the SEC sought to amend their initial complaint to avoid forcing the judge to determine if these assets should be treated as securities or not. The case against Binance is just one in a large list of legal proceedings opened against major companies in the blockchain space including eToro, Coinbase, and Ripple that created significant confusion about how the agency viewed and categorized digital assets.

Prominent Voices in the Crypto Space Roast the SEC for Its Ambiguous Approach

Reactions from prominent players in the sector did not wait starting with Paul Grewal, the Chief Legal Officer of the US-based crypto exchange Coinbase who took to social media to share his opinion on the matter.

He claims that the SEC cleared viewed tokens as securities in past cases as part of a “regulation by enforcement campaign,” referring to the unilateral legal actions taken by the agency to allegedly make the space safer by targeting exchanges, token issuers, and protocols without clarifying their rules or policies.

He questioned the reason why they were changing their mind in this specific case and stated that it is still unclear to everyone how the SEC differentiates between which cryptocurrencies will be treated as securities and which won’t.

“That’s apparently for the @SECGov to know, and the rest of us to find out only if and when we are sued,” Grewal commented in his social media post on X.

Meanwhile, Stuart Alderoty, the Chief Legal Officer of Ripple, also shared his thoughts on the amendment on X. He stressed that the agency should by now acknowledge that they have contradicted themselves.

He criticized the agency for misleading judges in previous cases, including its lawsuit against Ripple, by using the term “crypto asset security” without having any legal basis to employ it.

Finally, Jake Chervinsky, Chief Legal Officer at Variant Fund, expressed shock at the SEC’s statement, describing it as an extreme form of gaslighting. This sentiment reflects the frustration felt by companies and leaders in the industry who have been struggling for years to navigate the complex and often ambiguous US crypto regulatory landscape.

The SEC’s clarification has reignited discussions about the need for clearer regulatory guidelines for the space. Many industry participants have long argued that the SEC’s approach has created an uncertain and challenging environment for crypto businesses to operate in and grow their ventures.

Appeals Case Against Ripple for Sale of XRP to Retail Investors Could Be Impacted

The amendment made by the SEC to its complaint against Binance could have significant implications for other cases it is pursuing against companies in the crypto sector. Although the agency could still opt to prosecute entities that offer unregistered securities, their language change may narrow down their target.

The SEC asserted that, even under its narrower definition, Binance’s tokens “continue to be offered and sold as investment contracts.”

However, its decision not to challenge Binance’s argument that crypto assets offered during initial coin offerings (ICOs) do not remain securities in the secondary market could mark a significant turning point for the industry.

Meanwhile, certain high-profile cases including the one involving Ripple’s XRP and the sale of the token to retail investors – which is currently being reviewed by a court of appeals – could be dramatically influenced by the SEC’s comments as judges now have additional legal basis to justify the decision not to treat XRP as an investment contract.

The November Election Could Mark a Pivotal Moment for Crypto Companies

The SEC’s clarification of the term “crypto asset security” comes as both the agency and the Commodity Futures Trading Commission (CFTC) are being constantly pressed by lawmakers, attorneys, and industry experts to provide clearer guidelines for the industry.

Critics have long described the current approach as a highly confusing and damaging way to ensure the safeness of a nascent sector. They have called for additional transparency and clearer rules.

Summer Mersinger, one of the CFTC’s five commissioners, recently blamed the CFTC for engaging in “regulation through enforcement” and called for clearer direction for crypto exchanges. Mersinger expressed hope that the commission would consider drafting specific rules for how decentralized finance (DeFi) protocols could comply with existing regulations.

As the crypto industry continues to grow, lawmakers are recognizing the need to speed up their efforts to pass a comprehensive legal framework that puts an end to these time-consuming and unproductive disputes.

The 2024 presidential election could mark a pivotal moment for these endeavors as President Donald Trump has teamed up with a crypto-supporter, JD Vance, and has repeatedly voiced his commitment to work with Congress to help the sector gain the regulatory clarity it desperately needs.

Trump has said that he will immediately fire Gary Gensler, the current Chairman of the SEC, due to his hostile attitude toward the industry and has blamed Democrats for limiting innovation by antagonizing initiatives within the blockchain space.

It will be crucial for regulators, lawmakers, and industry leaders to work together to develop a regulatory framework that balances investor protection with the need for innovation and growth in this sector.

The SEC’s recent clarification may serve as a catalyst for more constructive dialogue and collaboration and could potentially lead to a more transparent and effective regulatory environment for digital assets in the future.