Experts assessed how fair it is to equate listed tokens to securities
The U.S. Securities and Exchange Commission (SEC) is investigating the U.S. cryptocurrency exchange Coinbase. According to Bloomberg, the SEC intends to find out if the crypto exchange allowed illegal trading in assets that should be registered as securities and whether they have the appropriate registration. Amid the news of the SEC investigation, investors began selling the company’s shares, causing the rate to drop 21% to $52.90. As of July 28, 17:00 Moscow time, the stock is trading at $56.60.
In response, Coinbase posted a blog post stating that the exchange does not list securities for trading. The exchange’s legal representative Paul Grewal said that Coinbase analyzes whether an asset can be considered a security and considers regulatory requirements and the security of the asset before listing tokens. He noted that after reviewing the same facts as the SEC, the U.S. Department of Justice (DoJ) decided not to file fraud charges and that Coinbase was willing to cooperate with the commission.
The SEC’s attention to Coinbase was drawn to the increase in the number of tokens available for trading, as well as the criminal case against the exchange’s former manager, Ishanu Wahi. On July 21, a New York court, along with the FBI, charged the former employee and his associates with insider trading. According to the case file, they made $1.5 million from the listings of 25 cryptocurrencies. The SEC said the nine tokens traded by the defendants were recognized as securities.
The fraudulent scheme received a lot of publicity from well-known cryptoinfluencer and UpOnly podcast host Jordan Fish (@Cobie). In April, Fish published a post on Twitter saying that he discovered an Ethereum wallet with tokens purchased 24 hours before the listing was published on Coinbase. The tweet was subsequently referred to by the Department of Justice in an indictment.
Fish has also publicly criticized Coinbase more than once, in particular decisions about token listing, behind which, in his opinion, are dubious projects. For example, the developers of the Polkamon project were accused of a pump-and-dump scheme, while Big Data Protocol was accused of suspending its work after users’ funds were blocked due to an incorrectly written contract. The former lost 90% in value since the creation of the project, and the token rate of the latter, after a similar drop, rose sharply by 132% when the listing on Coinbase was announced.
How fair are the claims
According to Vladislav Utushkin, the founder of TOTHEMOON group of companies, in case the pressure on stock exchanges continues, one may expect their transfer to jurisdictions not controlled by the SEC or a drop in their popularity in favor of other market players not subject to the influence of institutions. “Undoubtedly, there is an understanding of this in the power circles of the USA. For example, Pat Toomey, deputy chairman of the U.S. Senate Banking Committee, accused the head of the SEC that his agency’s regulatory measures were one of the prerequisites for the collapse of Celsius. They also publicly refused to explain why the nine assets placed on Coinbase should be considered securities,” the expert explained
Managing Partner of GMT Legal Andrey Tugarin noted that the practice of classifying tokens as securities (investment contracts) has existed for a long time, and one of the most sensational examples was the SEC decision regarding the recognition of Gram tokens sold to investors of the Telegram messenger ICO in 2017 as securities. According to a lawyer, the SEC’s claims against Coinbase are a significant development, because in this case, the agency’s charges are not about specific projects, as it was before, but directly about the platform. After the Coinbase case, exchanges are likely to further tighten the rules for listing and issuing tokens on their platforms. “This case will not create a new legal regulation, but it will expand the current one,” the expert concluded.
Executive Director of InDeFi Smart Bank Sergey Mendeleyev said that he does not understand the criteria according to which the SEC classifies a particular token as a security.
“Judging by the fact that such issues arise all the time and often several years after listing, there are some problems in definitions. If even the lawyers of the Commission can’t make up their minds on this issue, it’s unclear why the legal department of Coinbase should distinguish such things. It makes more sense for the commission to look more closely at anonymous exchanges that list blatantly fraudulent projects and have been seen stealing money from users.”The expert
As for the exchange’s decision on token placement policy, Andrey Tugarin believes that if from the legal point of view the project is legal and does not violate the current legislation, exchanges have the right to allow tokens of such a project to be listed, even if the assets have little liquidity. It is not the task of lawyers, but of the market to evaluate and form the liquidity of tokens.
“Given that the crypto industry is a decentralized and uncontrolled institution, the rules of token listing, as well as their recognition as questionable or illiquid, will be worked out together, by trial and error. This is certainly an example of digital democracy.”Vladislav Utushkin
According to Sergey Mendeleev, it makes no sense for large exchanges like Coinbase to float dubious projects, and with the current regulation any token can be recognized as a security, including, for example, Ethereum.
“Let me remind you that [Ethereum chief developer Vitalik] Buterin also conducted ICOs. We don’t need such regulation, comrades.”The expert