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SEC Begins Probe into Binance’s BNB ICO, Should Holders Be Worried?

The US Securities and Exchange Commission has hardly been crypto’s best friend over the past few years. Not content with slapping a $100 million fine on BlockFi and initiating a damaging legal case against Ripple in December 2020, it has now begun an investigation into Binance. And not just any inquiry, but rather a probe into whether the world’s largest exchange violated securities laws when it sold its BNB token to the public via a 2017 ICO (initial coin offering).

Given that this investigation has plenty of overlap with the ongoing Ripple case, it potentially sets a dangerous precedent for other altcoins, especially those that had a token sale of some kind. S0 should altcoin holders be worried? The answer is yes, especially if the SEC wins its case against Ripple, but also no, since holding an initial offering seems to be a condition for a virtual currency being a security.

Binance operating on a mobile device

The SEC Puts Binance In Its Sights

While the SEC has not initiated legal action against Binance, reports have revealed that it is quietly investigating the circumstances and conditions of the exchange’s 2017 BNB token sale. Specifically, the regulator is evaluating whether this sale — which raised approximately $15 million — was an unregistered securities offering.

If it was, Binance broke securities law, as established in the 1933 Securities Act. Assuming that the SEC determines the sale was a securities offering, it could end up suing Binance in the same way it sued Ripple at the end of 2020. However, the probe is likely to last for several months, and it’s worth pointing out that not all enforcement investigations result in legal action.

Still, it doesn’t look great for Binance, which has recently come under increasing scrutiny from regulators. In the past year or so, it has been investigated by the IRS, Justice Department and CFTC for possible money laundering and insider trading breaches. It has also been subject to warnings from the UK’s Financial Conduct Authority regarding its access to a UK payments network, and cautioned in 2021 by Germany’s BaFin regarding the sale of tokenized securities.

To be fair, Binance has taken steps in recent weeks to improve its regulatory game, hiring former regulators to improve compliance. But with regulators seemingly having some kind of ‘vendetta’ against the exchange (it is the world’s largest), there’s every chance that the SEC may be determined to pursue a legal action against Binance.

“It would not be appropriate for us to comment on our ongoing conversations with regulators, which include education, assistance, and voluntary responses to information requests,” wrote a spokesperson for the exchange in response to inquiries from Bloomberg. “We will continue to meet all requirements set by regulators.”

It goes without saying that the initiation of legal proceedings against Binance would be devastating for the exchange and its BNB token. When the SEC opened its case against Ripple, for instance, XRP’s price fell from about $0.583 to $0.212, a drop of 63.6% in a matter of days.

The effect of the SEC’s probe can be seen in the fall from nearly $310 to under $280. Source: CoinGecko

Something similar could happen to BNB’s price, creating a considerable amount of risk for its holders. Indeed, following the news of the SEC’s investigation, BNB dropped from around $306 to $276, a loss of 10%. This is already a big amount, but when you add the likelihood of delistings (e.g. Bithumb, KuCoin and FTX also list BNB), the effect would be much bigger if the regulator initiates legal proceedings.

Should Altcoin Holders Be Worried About Legal Action?

Seeing this news, holders of other altcoins may be left wondering whether their crypto is at risk from the effects of enforcement action. This is an understandable response, particularly in light of the uncertainty that surrounds the legal status of cryptocurrencies, and whether or not they fall afoul of the Howey test.

However, there is a simple test for whether or not altcoin holders should be worried about their holdings: ICOs. If an altcoin was made available via an initial coin offering (i.e. a public token sale), then there’s a good chance that it could find itself in the SEC’s crosshairs.

SEC chairman Gary Gensler highlighted this strong probability in August of 2021, when he gave a speech and declared, “I believe every ICO I have seen is a security.” Nonetheless, if a cryptocurrency is relatively small, the SEC may not even bother with it, but if it has gained plenty of traction since its initial offering, it may find itself a target sooner or later.

For the sake of reference, here are some notable coins that were initially made available via a token sale:

  • Ethereum – held an ICO worth $18.3 million in 2014

  • NEO – held an ICO worth $28 million in 2017

  • Tezos – raised $232 million in a July 2017 ICO

  • Filecoin – raised $257 million in September 2017

  • EOS – held an ICO reportedly worth $4.2 billion in 2018

  • Bancor – raised $153 million in 2017

  • Polkadot – held an ICO worth $140 million in 2017

  • Decentraland – raised $26 million in 2017

  • Basic Attention Token – held an ICO worth $35 million in 2017

  • Ox Protocol – raised $24 million in August 2017

  • Chainlink – held an ICO worth $32 million in 2017

It’s always worth checking any other coins you might hold to see if they also had an ICO, because the SEC’s current stance seems to be that having a token sale is enough to make a coin a security.

Of course, not everyone is convinced the SEC will apply such a simple rule in practice. Back in 2018, even the SEC’s then-director of corporation finance declared that Ethereum (as well as Bitcoin) is not a security. It’s therefore possible that some altcoins with a sufficient degree of decentralization may escape legal consequences, although determining the ‘sufficient’ degree of decentralization would appear to be highly subjective.

What this means is that, as with most things in the cryptocurrency sector, investors can’t really be sure of anything. Although if your altcoin was airdropped or simply distributed as part of its normal operations (as with Bitcoin), you can probably rest safe, at least for now.

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CryptoVantage Author Simon Chandler

About the Author

Simon Chandler

Simon Chandler is a journalist based in London. He writes about technology, markets and politics, and has bylines for Forbes, Digital Trends, CCN, Wired, TechCrunch, the Verge, the Sun, the New Internationalist, and TruthOut, among many others. His Twitter handle is @_simonchandler_

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