The Securities and Exchange Commission is suing Coinbase (COIN) and Binance because it believes many cryptocurrencies traded on those exchanges are securities that should be registered with the US regulator.
There is one big exception: bitcoin.
“The SEC has been extremely clear. Bitcoin is not a security,” Steven Lubka, managing director of Swan Bitcoin, told Yahoo Finance. “We’re very, very confident that never changes.”
That belief is encouraging investors to stick with the world’s largest cryptocurrency despite the industry turmoil triggered by new SEC lawsuits against the biggest cryptocurrency exchanges in the world and the US.
Bitcoin (BTC-USD) was up 5% Wednesday at 9:30 am New York time to $26,759, before settling back to $26,400 by noon. Its market share, a ratio of the coin’s market capitalization over the total crypto market capitalization, rose 0.85% over the same period, suggesting crypto investors are seeking it out as a safe bet within the market.
Bitcoin is up 58% year to date, while still down by roughly the same amount from its November 2021 peak of $68,790.
Some bitcoin proponents expressed their optimism on social media, suggesting their favorite digital asset could benefit amid the legal battles.
Cory Klippsten, an outspoken critic of the larger crypto ecosystem and CEO of bitcoin financial services firm Swan Bitcoin, tweeted a graphic of bitcoin’s recovery this week and added a sarcastic: “Oh noes! Whatever is bitcoin going to do???!”
Pierre Rochard of bitcoin miner Riot Platforms (RIOT) tweeted that Coinbase should “pivot back to being focused on #Bitcoin.”
Twitter co-founder Jack Dorsey then attached the Rochard comment to his Twitter feed and added a hundred points emoji.
Coinbase does rely on bitcoin for roughly one-third of its trading volume and transaction revenue.
The Howey test
The SEC’s framework for evaluating digital assets as securities relies on the so-called Howey Test. It can be linked back to a 1946 Supreme Court case dealing with tracts of Florida orange groves sold by W.J. Howey Co. and leased back to the company.
The Supreme Court labeled these leaseback deals as investment contracts, meaning they needed to be registered with the SEC.
It also defined what constitutes a security: “an investment of money in a common enterprise with profits to come solely from the efforts of others.”
Bitcoin, its defenders say, doesn’t meet that test. It wasn’t created, they say, by entrepreneurs seeking profits via pre-listed private sales to larger institutional investors — as other digital coins have.
It was instead created by anonymous software developer Satoshi Nakamoto in January 2009 as an open-source concept.
“Satoshi never raised a single dollar and because he never raised a single dollar, there were no expectations of future profits in an investment contract,” Lubka said.
While there is no law declaring whether or not bitcoin is a security, SEC Chair Gary Gensler as well as former Chair Jay Clayton have indicated in numerous public comments they do not believe bitcoin is a security. Instead, most investors understand it to be a commodity such as gold or wheat.
“I’m extremely confident that Bitcoin is going to remain a commodity and will not be labeled a security,” Grant McCarty, co-executive director of advocacy group Bitcoin Policy Institute, told Yahoo Finance.
The SEC listed 19 different crypto tokens in its lawsuits against Coinbase and Binance that it considers securities, accounting for roughly 11% of crypto’s total market capitalization. Those coins fell Wednesday.
BNB (BNB-USD) was down 7.5%, Cardano’s ADA (ADA-USD) was down 7%, Polygon’s MATIC (MATIC-USD) token was down 4.8% while Solana’s SOL token was down 4.2%.
After falling 12% Tuesday, Coinbase’s stock rose 2.8% at Wednesday’s open.
Customers withdrew $105 million from Coinbase in the 24 hours after it was sued by the SEC, after losing $1.3 billion in the previous 24 hours, according to crypto data provider Nansen.
Binance customers pulled $492 million and $1.4 billion in the two previous 24-hour periods.
