The SEC has been wrong about ‘crypto asset securities’ all along

The Securities and Exchange Commission has finally admitted what we’ve known all along: “Crypto asset security” was a made-up term with no legal basis. After years of misleading the courts and the public, the agency’s quiet abandonment of the term signals a major retreat in its regulation by enforcement campaign against the digital asset industry.

Rather than putting out proactive or helpful guidance in recent years, the SEC has been suing industry participants in a thinly veiled attempt to kill crypto. So far, it isn’t going well. If there was any doubt that the SEC’s approach is destined for failure, the recent shattering of the myth behind “crypto asset security” should put it to rest.

Last year, the SEC filed enforcement actions against many of the major centralized exchanges, and is currently fighting in different courts against Binance, Coinbase and Kraken. Two weeks ago, the SEC moved to amend its complaint in the Binance case. Buried in a footnote on page 24 of the motion, the SEC gave a stunning apology:

“As this Court noted and as the SEC reiterates, with its use of the term ‘crypto asset securities,’ the SEC is not referring to the crypto asset itself as the security; rather, as the SEC has consistently maintained since [Telegram], the term is a shorthand…. Nevertheless, to avoid any confusion, the [amended complaint] no longer uses the shorthand term, and the SEC regrets any confusion it may have invited in this regard.”

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Rarely in history has a single footnote scrambled the minds of so many expert lawyers at once. Coinbase Chief Legal Officer Paul Grewal described it as “shameless.” Uniswap Labs CLO Katherine Minarik said “no government agency should work this way.” Ripple Labs CLO Stuart Alderoty suggested the SEC “admit it has become a twisted pretzel of contradictions.”

Why react so strongly? There are at least three reasons.

First, the footnote is demonstrably false. Far from having “consistently maintained” that it “is not referring to the crypto asset itself as the security,” the SEC has relentlessly propagated the myth that tokens themselves are securities.

The SEC declared that view as early as 2017 in its settlement with Munchee, where it said that “digital assets may be securities” and that “MUN tokens were securities…because they were investment contracts.” The SEC has consistently reiterated that view in the years since. For example, in its 2018 ICO framework, the SEC analyzed “whether a digital asset is offered or sold as an investment contract and, therefore, is a security.” In its 2020 complaint against Ripple Labs, the SEC alleged that “XRP was an investment contract and therefore a security[.]” And in its 2023 complaint against Coinbase, the SEC accused Coinbase of making “available for trading crypto assets that are investment contracts under the Howey test[.]”

Even the SEC’s reference to Telegram in its footnote seems insincere. The SEC cites the Telegram case as if to show through its own statements that it has a history of “consistently maintaining” that tokens themselves are not securities. But the citation itself doesn’t reference a statement by the SEC — it quotes the court holding that tokens are “little more than alphanumeric cryptographic sequence[.]” In reality, the SEC alleged in its 2019 complaint against Telegram that “Grams are securities” because “Grams are investment contracts.”

This isn’t even the first time the SEC has made misrepresentations to the court this year. In an enforcement action against Debt Box, where the SEC lied to the court in order to get the relief it was seeking against defendants, the court took the rare step of imposing sanctions against the SEC because its “pervasive misconduct…demonstrate[d] a pattern of organizational bad faith and broadly implicate[d] the Commission itself—not just isolated individuals.” In an 80-page opinion using the term “bad faith” 46 times, the court stated that the SEC’s conduct “constitute[d] a gross abuse of the power entrusted to it by Congress and substantially undermined the integrity of [the] proceedings and the judicial process.”

Second, the footnote signals an SEC in disarray. As a federal agency with extraordinary power to regulate the US economy, we expect — and administrative law requires — that the SEC will maintain consistent positions within and across its divisions. In other words, the left hand ought to know what the right hand is doing.

Yet, on the exact same day that the enforcement division half-heartedly apologized in the Binance case for the confusion it caused by using the term “crypto asset securities,” the same division used that term eight times in its settlement with eToro, and the SEC’s X account posted an investor alert from the Office of Investor Education and Advocacy using the term five times. These blatant inconsistencies call into question how entrepreneurs and investors are supposed to understand the law, or the SEC’s interpretation of the law, when the agency itself can’t even decide what language to use in describing it.

Third, the footnote betrays the SEC knowing its view of the law is wrong and how it’s taking different advocacy positions simply to win its enforcement cases. The argument that tokens themselves are securities is central to the SEC’s enforcement actions against centralized exchanges — the SEC hung its hat on that argument in the Binance case, claiming that tokens are “the embodiment of the investment contract” and therefore subject to the securities laws as they trade in secondary markets. The court explicitly called out the SEC’s inconsistency in its use of the term “crypto asset securities” and rejected that argument, holding that it “is not enough, standing alone, to bring secondary sales” of specific tokens under the SEC’s jurisdiction.

As a neutral regulator meant to serve the interests of justice, the SEC isn’t supposed to take different positions in different cases just because it wants to win them. Instead, the SEC should be presenting a consistent view of the law — assuming it has one. This footnote proves it does not. And that means defendants will have a renewed opportunity to assert a fair notice defense against SEC enforcement, arguing that the law is so vague, a person of “common intelligence” can’t determine its meaning.

The SEC’s sudden abandonment of the term “crypto asset securities” isn’t just semantics, much as they would like to handwave and say so. If the SEC can’t characterize tokens as securities, it will have a hard time convincing courts that it has authority over secondary markets for digital assets. The crux of the securities laws is a registration regime for securities — but if the tokens themselves aren’t securities, then it’s unclear what exactly should be registered in the first place.

Crypto lawyers aren’t the only ones to notice the SEC’s retreat from the term “crypto asset securities.” In recent Congress hearings, members on both sides of the aisle — from Ritchie Torres to Tom Emmer — remarked on how the SEC made up the term despite having no basis in federal law, only to later retract it and apologize for its use. Now that the myth of “crypto asset security” has been exposed, the SEC will have to confront the reality of its weakness in both the courts and Congress.

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