SEC Crackdown: Inside the Tokens the Commission Labeled Securities

On June 5, Web3 was sent into a frenzy when the U.S. Securities and Exchange Commission (SEC) lodged a comprehensive lawsuit against Binance. The lawsuit — which accuses the world’s largest crypto exchange of mismanagement of customer funds, among other things — has remained top of mind for all operating within the blockchain industry.

Of course, the situation only got worse once the SEC came after Coinbase. Just a day after taking up arms against Binance, the agency announced that it was suing Coinbase for allegedly operating as an unregistered broker of securities, an unregistered exchange, and an unregistered clearing agency.

While the crypto and NFT space anxiously await the ramifications that might befall the exchange giants, a specific facet of the Binance lawsuit has begun to garner additional attention. As dictated in background section eight of the SEC filing, in addition to platform native tokens $BNB and $BUSD, a range of other popular tokens available on the exchange are now being considered by the government to be securities.

Here’s a rundown of the 10 tokens on the list.

ADA (Cardano)

ADA is the native token of the Cardano blockchain. Although not a particularly major player in the NFT space, Cardano has maintained significant popularity among crypto enthusiasts and investors as Web3 has grown. Notably, Cardano is the eighth-highest-ranked cryptocurrency by market cap and was considered the top blockchain protocol by development activity in 2022.

As far as the SEC is concerned, due to efforts carried out by the “three entities responsible for Cardano,” which are listed in the filing as the Cardano Foundation, Input Output Hong Kong (IOHK), and Emurgo, ADA can be viewed as a security. “ADA holders, including those who purchased ADA, since November 2017, reasonably view ADA as an investment and expect to profit,” the SEC wrote.

ALGO (Algorand)

ALGO is the native token of Algorand, a blockchain that is primarily focused on building technology that accelerates the convergence between decentralized (DeFi) and traditional finance (TradFi). The protocol is essentially designed to function like a major payment processor but in a decentralized format as a blockchain network.

Similar to ADA (and the other entrants on this list), the SEC is now viewing ALGO as a security, alleging that “information Algorand, Inc. and the Algorand Foundation publicly disseminated has led ALGO holders […] reasonably to view ALGO as an investment in and to expect to profit from Algorand.”

Furthermore, the SEC feels that the Algorand Foundations February 2022 launch of AlgoHub and its subsequent $10 million developer incentive have “led ALGO investors, including those who purchased ALGO after it became available for trading on the Binance Platforms, to reasonably expect that the demand for ALGO would likely increase […] thereby resulting in a price increase for ALGO.”

ATOM (Cosmos)

ATOM is the native token of the Cosmos Network, a decentralized network of independent, scalable, and interoperable blockchains that seek to create a foundation for a new token economy and promote interoperability between traditionally siloed blockchains.

According to the SEC, “information publicly disseminated by Cosmos Co-Founder Ethan Buchman, The Interchain Foundation (the IFC, a Swiss non-profit organization of which Buchman is President), and Cosmos Co-Founder Jae Kwon has led ATOM holders reasonably to view ATOM as an investment in and to expect to profit from ICF’s, Kwon’s, and Buchman’s efforts to grow the Cosmos protocol, which, in turn, would increase the demand for and value of ATOM.”

AXS (Axie Infinity Shards)

AXS, also called Axie Infinity Shards, is potentially one of the most notable tokens listed by the SEC. Because, alongside MANA and SAND (discussed later), AXS is widely considered a gaming token. That is to say that, in contrast with the other blockchain-native tokens listed here, AXS is not used to vote, validate or otherwise support a chain but to support the Axie Infinity gaming ecosystem and act as an in-game currency similar to, say, Fortnite V-Bucks or Roblox Robux.

To the SEC, who describe AXS as “Ethereum tokens that are native to the Axie Infinity game,” the token seemingly bares no significant difference from others listed. “The information Sky Mavis publicly disseminated has led AXS holders reasonably to view AXS as an investment in and to expect to profit from Sky Mavis’s efforts to grow the Axie protocol,” said the SEC.

Interestingly enough, the SEC did make the consideration of stating that it understood the functionality of AXS, saying that “players of the Axie game can earn AXS for successfully playing the Axie game and can use AXS to make in-game purchases.” Although this surely does little to undermine the potential severity of AXS being considered a security, which has put the majority of the Web3 gaming sector up in arms.

COTI (Currency of the Internet)

COTI, or Currency of the Internet, is the native token for the COTI network: an enterprise-grade layer-one blockchain purposed as an independent payment and loyalty ecosystem. Although similar to chains like Algorand, one unique factor to consider with its recent SEC labeling is that the COTI prides itself on being “regulation-ready.”

Per the COTI site, “COTI is regulation-ready, which is a base requirement for enterprises when entering Web3. COTI has performed Know Your Customer (KYC) and Anti-Money Laundering (AML) checks to all holders of COTI’s native coin in the COTI VIPER Wallet since inception and works in a prudent manner, making it ready for the challenges of tomorrow.”

True to form, it seems the SEC is now putting COTI’s “regulation-ready” status to the test. And, per the commission’s filing, considers the token to be a security and that “information COTI publicly disseminated has led COTI holders reasonably to view COTI as an investment.”

FIL (Filecoin)

FIL is the native currency of Filecoin, a decentralized, open-source, and public storage network meant to store “humanity’s most important information. Practically speaking, the chain, which was created by Protocol Labs, acts as a crypto and digital payment network that functions as a chain of tipsets rather than a chain of blocks.

Although the SEC agreed, per filings, that Protocol Labs has “continued to use funds from the sale of FIL to develop, expand, and promote the Filecoin network,” it too is subject to similar labeling as other tokens on this list. One addition that the SEC made to the FIL entry, though, was to single out Filecoin’s deflationary mechanics, saying, “burning of FIL as part of Filecoin’s economic features has led investors reasonably to view their purchase of FIL as having the potential for profit.”

MANA (Decentraland)

MANA is a token native to Decentraland: the 3D virtual world browser-based platform built on the Ethereum blockchain. Similar to AXS, MANA is used as a sort of in-game currency in Decentraland, although Decentraland itself is considered a metaverse experience rather than a game.

As per Jonah Blake, GP at Game Fund Partners, MANA and SAND are generally accepted to be metaverse tokens. Yet, it seems that both metaverse tokens and gaming tokens are being considered the purview of the SEC, and the commission largely fails to distinguish them from the other blockchain-native “utility” tokens on this list.

In the SEC’s filings, Decentraland’s business plan and the rollout of the company’s Initial Coin Offering (ICO) are both picked apart, with the commission again concluding that “the information Decentraland publicly disseminated has led MANA holders reasonably to view MANA as an investment in and to expect to profit from Decentraland’s efforts.”

MATIC (Polygon)

MATIC and SOL are two of the perhaps most consequential tokens listed as securities by the SEC. Although each token being considered by the SEC is undoubtedly of consequence — with the gaming and metaverse tokens being the most unique cases — the native currencies of the Polygon and Solana blockchains remain a significantly major part of the Web3 ecosystem.

Notably, MATIC is listed as the 11th highest-ranked cryptocurrency in terms of market cap. Similarly, the Polygon NFT market, although not as robust as Ethereum, Bitcoin, Solana, or Tezos, acts as a prominent facet of the overall NFT ecosystem. And in the eyes of the SEC, information publicly disseminated by Polygon, even prior to the chain rebranding from “Matic” to “Poygon” in 2021, “has led MATIC holders reasonably to expect to profit from Polygon’s efforts.”

Here’s a part from the Coinbase lawsuit, in which the SEC claims that Polycon (Matic) is a security.

The SEC cites the Polygon Cofounder’s own tweets about the token and his efforts to boost its price as part of its claim pic.twitter.com/g74X5MnJTD

— Joe Weisenthal (@TheStalwart) June 6, 2023

SAND (The Sandbox)

SAND is the native token of The Sandbox, a 2D virtual world originally built as a mobile game. Predating even Ethereum itself, The Sandbox launched its 3D blockchain-powered version on ETH in 2019. As previously mentioned in relation to AXS and MANA, SAND is somewhat of an outlier on this list as it is generally considered a metaverse token.

Again, though, regardless of its connotation within the NFT space or Web3 at large, SAND and the efforts of its developer TSB Gaming Ltd. (a wholly owned subsidiary of Animoca), have been identified by the SEC as investments that investors might reasonably expect to profit from.

SOL (Solana)

SOL is a token native to the Solana blockchain. SOL is listed as the 10th highest-ranked cryptocurrency in terms of market cap and is possibly the most consequential token being eyed by the SEC.

As previously mentioned, both MATIC and SOL are considered integral parts of the NFT ecosystem, although SOL is surely significantly more impactful to the overall health of the NFT market than MATIC. Although ETH and BTC were not listed in the Binance lawsuit, given that SOL and MATIC are on the chopping block, some have publicly wondered if it may only be a matter of time till they are labeled similarly.

Of SOL, the SEC stated in its filings that those who have purchased and hold SOL might reasonably view the token “as an investment in and expect to profit from Solana Labs’ efforts to grow the Solana protocol, which, in turn, would increase the demand for and value of SOL.”

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