New Lawsuit Alleging That Solana Is A Security Could Have Big Implications For The Crypto Investment Landscape

A class action lawsuit has been filed against Solana Labs, a for-profit company working on the development of the Solana blockchain, in a California federal court last week accusing the company and people within the ecosystem of making illegal profits and promoting its token, SOL, as an unregistered security.

The outcome of the lawsuit could have major implications for the future of the crypto industry, which has had to function for years under a cloud of uncertainty about whether its tokens should qualify as securities. If SOL is determined to be a security, it could open up many similar tokens available on prominent crypto exchanges such as Coinbase, Kraken, Binance, and others to similar scrutiny. Ultimately these platforms could be forced to de-list SOL and other major crypto tokens. For context, Coinbase and Kraken, along with many other platforms de-listed XRP in late 2020 when the SEC sued San Francisco-based Ripple for selling $1.3 billion of the asset to purchasers in what it called an unregistered security.

The lawsuit was filed by the plaintiff, Mark Young, with Roche Freedman LLP and Schneider Wallace Cottrell Konecky on behalf of all investors who bought Solana (SOL) tokens from March 24, 2020 through the present.

The defendants listed in the suit are Solana Labs and its CEO Anatoly Yakovenko, the non-profit Solana Foundation, prominent crypto venture capital firm Multicoin Capital and CEO Kyle Samani, and trading platform FalconX, which recently raised $150 million at an $8 billion valuation.

“Defendants made enormous profits through the sale of SOL securities to retail investors in the United States in violation of the registration provisions of federal and state securities laws, and the investors have suffered enormous losses,” according to the lawsuit. SOL had been one of the best performing crypto assets in recent years, benefiting from the stimulus-driven market surge as well as its top fanboy, billionaire Sam Bankman-Fried, who was not mentioned in the suit. The asset reached a high of almost $260 in November 2021, but it has since fallen 85%. The platform has also been plagued by repeated outages over the past few months.

In the complaint, Young describes Solana as a highly centralized cryptocurrency whose insiders have benefitted at the expense of investors. “The cornerstone of the value of SOL securities is the sum of Solana Labs, Solana Foundation, and Yakovenko’s management and implementation of the Solana blockchain. They created the Solana blockchain network and all of the SOL securities in circulation, and likewise determined who would receive SOL securities and under what conditions,” said the lawsuit.

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In the U.S., the most common method for determining whether an asset is a security is the Howey Test, a common four-prong framework stemming from a 1936 court case initiated by the SEC. To qualify an asset must consist of an investment of money, into a common enterprise, with the expectation of profit, driven primarily by the efforts of others. The suit states SOL investors invested money, participated in a Common Enterprise, and purchased SOL Securities with a reasonable expectation of profit.

The decentralized nature, or at least marketing narrative of blockchain platforms, is commonly used to promote the notion that its tokens should not be considered securities. However, the issue is far from being resolved. Last month, SEC Chairman Gary Gensler noted that the only asset he deems to not be a security is Bitcoin. The Commodity and Futures Trading Commission, the federal agency that regulates derivative contracts based on commodities also considers ether, the native token of Ethereum to be a commodity.

There have been many legislative efforts in the past, such as the Token Taxonomy Act, originally introduced in 2019 and then reintroduced by Rep. Warren Davidson (R-OH) in May 2021 to offer clarity on this particular issue. As the name suggests, the Token Taxonomy Act tried to provide a clear definition of a token that would be exempt from securities laws. The bill did not pass and received some criticism about being written too ambiguously and leaving too much up to SEC interpretation. At that time, members of the senate also questioned if this kind of bill was necessary.

More recently, a piece of Bipartisan crypto legislation titled “the Responsible Financial Innovation Act” was introduced Tuesday by Cynthia Lummis (R-WY) from the Senate Banking Committee and Kirsten Gillibrand (D-NY) from the Senate Agriculture Committee. However, despite its bi-partisan nature it is unclear whether or when the bill will be able to pass.

A jury trial has been requested in California as the plaintiff seeks damages and an acknowledgement of Solana being a security.

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