Amanda Tuminelli

Jake Chervinsky

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.



Read more: <a href="https://blockworks.co/news/lawmakers-frustrated-with-sec-crypto-approach">Rep. Torres: SEC invented ‘crypto asset security’ out of thin air</a>



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 <a href="https://storage.courtlistener.com/recap/gov.uscourts.dcd.256060/gov.uscourts.dcd.256060.273.1.pdf">moved to amend its complaint</a> 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.”



Rarely in history has a single footnote scrambled the minds of so many expert lawyers at once. Coinbase Chief Legal Officer Paul Grewal <a href="https://x.com/iampaulgrewal/status/1834455724631736428">described it</a> as “shameless.” Uniswap Labs CLO Katherine Minarik <a href="https://x.com/MinarikLaw/status/1834630275008963022">said</a> “no government agency should work this way.” Ripple Labs CLO Stuart Alderoty <a href="https://x.com/s_alderoty/status/1834464168399044842">suggested</a> 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 <a href="https://www.sec.gov/files/litigation/admin/2017/33-10445.pdf">settlement with Munchee</a>, 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 <a href="https://www.sec.gov/files/dlt-framework.pdf">ICO framework</a>, the SEC analyzed “whether a digital asset is offered or sold as an investment contract and, therefore, is a security.” In its 2020 <a href="https://www.courtlistener.com/docket/19857399/4/securities-and-exchange-commission-v-ripple-labs-inc/">complaint against Ripple Labs</a>, the SEC alleged that “XRP was an investment contract and therefore a security[.]” And in its 2023 <a href="https://storage.courtlistener.com/recap/gov.uscourts.nysd.599908/gov.uscourts.nysd.599908.1.0_1.pdf">complaint against Coinbase</a>, 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 <a href="https://storage.courtlistener.com/recap/gov.uscourts.nysd.524448/gov.uscourts.nysd.524448.1.0_3.pdf">complaint against Telegram</a> 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 <a href="https://assets.ctfassets.net/c5bd0wqjc7v0/1u6cDaFa3REg8wHUc6onZ8/e1257f64a80ca440d887f67821f872fe/Debt_Box_Order.pdf">sanctions</a> 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.”



Read more: <a href="https://blockworks.co/news/sec-commissioner-hearing-debt-box">Gensler says DEBT Box case ‘not well handled’ by SEC</a>



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 <a href="https://www.sec.gov/files/litigation/admin/2024/34-101001.pdf">settlement with eToro</a>, and the SEC’s X account posted an <a href="https://x.com/SECGov/status/1834340017897979934">investor alert</a> 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 <a href="https://www.courtlistener.com/docket/67474542/248/securities-and-exchange-commission-v-binance-holdings-limited/">rejected that argument</a>, 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 <a href="https://x.com/RepRitchie/status/1836814099394764934">Ritchie Torres</a> to <a href="https://x.com/GOPMajorityWhip/status/1838616037945716999">Tom Emmer</a> — 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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The SEC has been wrong about ‘crypto asset securities’ all along

Marisa Coppel

If we focus only on the activity of villains, we develop a blindspot for what heroes build.&nbsp;



Contrary to crypto skeptics’ views, the merits of decentralization and personal autonomy align with fundamental American rights: free speech, privacy and due process.



It is easy to look at new technology with skepticism, especially when bad actors have capitalized on vulnerabilities within these emerging systems. However, wrongdoers exist in every industry, every technological sector, and are quite adept at finding holes that the good actors haven’t yet filled.&nbsp;



Crypto’s unique benefits play a role in strengthening core American rights. We urge crypto’s antagonists to take a closer look at the technology’s role in enhancing — not undermining — some of our vital Constitutional provisions.



The First, Fourth and Fourteenth Amendments have been integral to the development of America&#8217;s enduring ideals of individual freedom. The guaranteed protection of individual liberties — including the ability to speak freely, protect one’s privacy, be treated equally under the law and feel confident in one’s right to be heard — have led individuals from across the world to flock to America in search of a better, safer life.&nbsp;



The strength of this system stems from the adaptable nature of these American fundamental rights. They can adjust to the development of new technologies, new systems of communication and new ways of living our lives. The response to the novel nature of digital assets and blockchain technology should be no different.&nbsp;



<h2 class="wp-block-heading">Crypto and your freedom of expression</h2>



The First Amendment protects our right to freedom of expression, whether through art, words, music, computer code or associations. This right is strengthened when individuals can own their own expressive content. And blockchain technology makes ownership possible online.&nbsp;



Websites built using Web3 technology allow individuals to create and retain ownership over their entire social media presence, so that no one platform can censor their content or delete their data. Global blockchain networks allow people a protected avenue of political speech without fear of <a href="https://blockworks.co/news/proof-of-innocence-tornado-cash-users" target="_blank" rel="noreferrer noopener">persecution</a>.&nbsp;



These Web3 ideals in action stand in stark contrast to traditional financial systems, which are often controlled by those with the largest financial stakes, <a href="https://www.eff.org/issues/financial-censorship">plagued by censorship</a>, and tend not to be concerned with innovation or the free exchange of ideas. Political dissidents, protestors or anyone with an unpopular opinion can easily have their <a href="https://www.nytimes.com/2022/02/22/world/americas/canada-protest-finances.html#:~:text=197-,Canada%20Ends%20Its%20Freeze%20on%20Hundreds%20of%20Accounts%20Tied%20to,people%20involved%20in%20the%20unrest.">financial lives disrupted</a> at the whim of overzealous bureaucrats or other elected officials. Digital assets and blockchain technology offer a lifeline to those whose voices might otherwise be silenced, empowering them to participate in a borderless and inclusive digital ecosystem.



The ideals of the open source software community also reflect the values of the First Amendment, the rights of Americans to trade ideas and information with limited barriers and restrictions.&nbsp;



Although computer code came into existence less than a century ago, it has become an important way in which developers express ideas and develop new technologies and systems. Source code is the language in which developers and designers share ideas about science and engineering across the globe and is <a href="https://www.coincenter.org/electronic-cash-decentralized-exchange-and-the-constitution/#fn27">even considered by some courts to be protected speech</a>.&nbsp;



While the “right to code” is not found in our founding documents (how could it be?), it should be considered, in the popular imagination, as something similar to a composer’s score or sharing the spoken or written word, <a href="https://survey.freedomforum.org/">an issue Americans are passionate about.</a> Rather than trying to treat code as a novel entity, crypto’s open source nature should be heralded as a test of the durability of America’s free speech protections, evolving the idea for the 21st century.



<h2 class="wp-block-heading">Moving away from centralization</h2>



The Fourth Amendment safeguards our privacy and security by protecting us from unreasonable searches and seizures. Open blockchain networks enhance privacy and ownership over financial and personal information in many ways.&nbsp;



When an individual signs up for a bank account at a traditional bank, that individual is required to provide that bank all of their important personal information. The bank may then share that individual’s transaction history with third parties, deny the individual transaction capabilities based on its own internal controls, or even decide to close the individual’s account as a response to how an individual uses their money.&nbsp;



Many would argue that this information sharing and oversight is <a href="https://blockworks.co/news/unbanked-crypto-trust-banking" target="_blank" rel="noreferrer noopener">unnecessarily invasive</a>, that it is an unsafe trade-off to offer up so many important personal details to a centralized institution that may be vulnerable to a hack or general misuse of that information.



For many of us, financial transactions reflect our beliefs, associations and desires. By maintaining financial privacy, people are free to transact and express themselves as they please — they can donate to political causes they believe in, pay for services that may be taboo or restricted in their particular jurisdiction and buy products without fear of losing access to their assets.&nbsp;



The Fourteenth Amendment guarantees equal protection under the law and ensures that no one is deprived of life, liberty or property without due process. Crypto’s fundamental promise lies in its ability to provide the same amount of information and access to anyone with an internet connection.&nbsp;



Born out of the wreckage of the 2008 financial crisis — where we learned the destructive impact of centralized power in the financial system — open blockchain networks and digital assets reduce the reliance on risky centralized intermediaries. These networks ensure there are little to no meaningful barriers to entry for those who wish to participate in the global economy, evening the playing field for <a href="https://www.pewresearch.org/global/2019/02/05/smartphone-ownership-is-growing-rapidly-around-the-world-but-not-always-equally/">everyone with an internet connection</a>. These networks also allow individuals to avoid the risk of their intermediaries closing or preventing access to their accounts.



The digital assets ecosystem, its users and its investors should not be treated differently than any other industry or technology.&nbsp;



Emerging technologies deserve the same protections as other, more established industries, allowing new ideas to rise or fall based on their merits — rather than on the views of unsympathetic regulators. Protecting innovation within an emerging technological field is key to this mission and is in full alignment with our fundamental rights, which adapt as new technologies emerge.&nbsp;



The right to free expression, privacy and due process are core American values, and our policymakers have a rare opportunity to reinforce those values by treating crypto equally and supporting the development of blockchain technology.&nbsp;



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As Senior Counsel for Blockchain Association, Marisa helps develop and advocate for policy positions on behalf of the crypto industry as well as manages long-term legal projects and strategic litigation. Prior to joining the Association, Marisa represented corporate clients in regulatory enforcement actions, internal investigations, and civil litigation matters at Covington &amp; Burling and O&#8217;Melveny &amp; Myers. Marisa also served as a federal law clerk in the U.S. District Court for the Central District of California. Marisa earned her B.A. from Brandeis University, and her J.D. from Loyola Law School in Los Angeles.



Amanda serves as the DEF&#8217;s Chief Legal Officer where she leads the organization&#8217;s impact litigation and policy efforts. Prior to joining DEF, Amanda was a lawyer at Kobre &amp; Kim, where she defended clients against criminal and regulatory investigations, government enforcement actions, and large scale litigation. Before Kobre &amp; Kim, she served as a law clerk for the Honorable Ann M. Donnelly of the U.S. District Court for the Eastern District of New York. Prior to her clerkship, Amanda practiced at Dechert LLP in their white-collar and securities litigation group, where she defended corporations and C-suite executives in government investigations and class-action securities disputes.



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