Solana survived Sam Bankman-Fried. Can it survive Gary Gensler?

“[It] has a shot at becoming one of the core layers on which most financial and informational transfers happen between applications in a natively Web3 world,” Bankman-Fried once told Fortune.

The FTX founder, who’s now facing criminal charges for fraud, lauded Solana so much that Alameda Research, his crypto hedge fund, had more than $1 billion in Solana’s native cryptocurrency on its balance sheet right before it and FTX suddenly collapsed in November.

In the days after Bankman-Fried’s crypto empire crumbled, the total market capitalization of SOL, Solana’s token, plummeted—from above $13 billion to about $5 billion, according to CoinMarketCap. But it quickly rebounded, and Gokal, the Solana cofounder, told Fortune in May that the FTX meltdown was “in the rearview mirror” as SOL’s market cap rose back to about $8 billion.

Now, Solana is facing a new threat. On Monday and Tuesday of last week, the Securities and Exchange Commission claimed that SOL and at least 12 other tokens are unregistered securities in lawsuits against Binance, the world’s largest cryptocurrency exchange, and Coinbase, the U.S.’s largest. After the lawsuits were filed, SEC Chair Gary Gensler said the crypto industry was populated with “hucksters, fraudsters, scam artists,” and “Ponzi schemes.”

Since then, the price of SOL dropped from about $22 to about $15—nearly 30% as of Monday evening. Its market cap, the second largest among tokens deemed securities by the SEC, has dropped from near $8.5 billion to about $6 billion. And Robinhood, a stock-trading app that also lets users buy and sell cryptocurrencies, said it will delist it from its platform come the end of June.

Solana weathered the fall of Bankman-Fried, but, despite developers’ continued belief in the blockchain, the pall of future litigation hangs over the cryptocurrency.

“It’s a black mark on their forehead,” Arthur Jakoby, a former SEC prosecutor who now co-chairs the securities litigation and enforcement team at  Herrick, Feinstein LLP, told Fortune. And, he added, it’s “potentially an existential threat” for the Solana ecosystem.

Is SOL a security?

The core of the SEC’s lawsuits boils down to the following: U.S. securities exchanges need to register with the SEC, and because Binance and Coinbase failed to register, they broke the law.

To make its case, the agency needs to first prove that both companies effectively operated as securities exchanges, which is why it’s arguing in both lawsuits that SOL and more than 12 other tokens, including Polygon’s MATIC and Cardano’s ADA, are unregistered securities. Both exchanges listed SOL.

The Solana Foundation, the legal entity that Yakavenko and Gokal founded to promote the cryptocurrency, strenuously disagrees with the SEC. After remaining quiet for days after both suits were filed, it responded to the SEC’s allegations.

“The Solana Foundation strongly believes that SOL is not a security,” a spokesperson said in a statement to Fortune. “We welcome the continued engagement of policymakers as constructive partners on regulation to achieve legal clarity on these issues for the thousands of entrepreneurs across the U.S. building in the digital assets space.”

The Solana Foundation disagrees with the characterization of SOL as a security. We welcome the continued engagement of policymakers as constructive partners on regulation to achieve legal clarity on these issues for the thousands of entrepreneurs across the U.S. building in the…

— Solana Foundation (@SolanaFndn) June 10, 2023

The SEC’s allegations have not translated to a direct legal threat for Solana since the agency has only sued Binance and Coinbase, not the Solana Foundation, its founders, or its promoters. Legal experts, however, say that the risk for Solana and other singled-out cryptocurrencies is unequivocally heightened.

“I would be very surprised if we didn’t see some actions in the near future against individual companies and/or their founders,” David Rosenfeld, an associate law professor at Northern Illinois University and former SEC prosecutor, wrote in an email to Fortune. “Crypto is a big priority for the SEC right now.”

Rosenfeld said that it’s impossible to predict what litigation the agency will bring, but he suspects that the SEC chose the tokens it can best prove are securities. “That doesn’t necessarily mean that the SEC will be pursuing these companies individually, but it does indicate that the agency thinks the case against them would be compelling,” he said.

Specifically, he mentioned that Solana Labs, another entity created by Yakovenko and Gokal, filed multiple reports with the agency from 2018 through 2020 to argue that SOL was exempt from registration, which, Rosenfeld told Fortune, “is something that could be seen as a concession that they are securities.”

Solana Labs did not release tokens publicly, as a deluge of companies did during the ICO craze of 2016, but rather sold them to venture capitalists to raise funds. It drummed up almost $340 million from private sales, according to the SEC’s Binance and Coinbase complaints. These private sales of SOL are a potential legal escape clause, Bloomberg’s Matt Levine described last week.

“If you look at the underlying technology and what SOL does…I think it’s a utility. It is not a security at all,” a cofounder of a prominent blockchain company, who declined to be named, told Fortune.

However, he added: “In terms of how it was promoted, I think the Solana Foundation and FTX treated it just like it was a security.”

Yesha Yadav, a law professor at Vanderbilt University who specializes in securities and cryptocurrency regulation, similarly told Fortune that the case against Solana isn’t simple. “There are some definite complexities here,” she said, pointing out, for example, how developers pay with SOL to use the blockchain’s computing power. 

Moreover, while the SEC has recently expanded its recent crypto litigation strategy to target exchanges, that doesn’t mean it will abandon enforcement actions against individual tokens, Jakoby, the former SEC prosecutor at  Herrick, told Fortune. “It’s hard to imagine,” Yadav added, “that if the SEC is serious about this, they’re not going to potentially bring a case against some of the very prominent coins that are listed.”

‘Continue to build’

While legal experts emphasized the potentially existential risks of the lawsuits for the singled-out cryptocurrencies, many Solana community members were comparatively optimistic.

The day after the SEC sued Coinbase, they flocked to New York City for one of Solana’s Hacker Houses, a frequent event the foundation hosts for developers, artists, and investors.

“​​For us and for the devs that we know, none of us are lawyers, so we’re still going to continue to build on cool tech,” the founder of payments app Sphere, which builds on Solana and other blockchains, told Fortune. (He declined to give his full name, citing the regulatory uncertainty.)

Aidan Neil, the cofounder of Ladder Labs, which has built a Solana-based video game as well as referral system, had a similarly blasé reaction once the lawsuits became public. “We didn’t budge for a second,” he told Fortune at the Hacker House. “Truthfully, we’ve been through so much that it was like, ‘Oh, great, here we go again.’”

And venture capitalists were also undeterred. “I guess we are gratified to see Solana again on the national stage,” an investor in Solana, who declined to give his full name out of regulatory concerns, told Fortune. “Solana was an extraordinarily compliant fundraise from the beginning.”

But, despite investor and developer insistence on the lawsuits’ non-impact, potential discord from the litigation has breached the Solana community. Days after the SEC sued Binance and Coinbase, some broached the idea of “forking,” or irrevocably updating, Solana to erase the tokens that FTX and Alameda continue to have on its balance sheet. No plans for a fork are imminent.

Do not fork Solana

1) The SOL belongs to creditors, not FTX

2) Shared state is the product of social consensus, which is incredibly valuable and the product of agreement from millions of users. Incredibly powerful. Break it at your own risk

3) Dangerous precedent

— Keone (@keoneHD) June 11, 2023

At the NYC Hacker House, talk of whether SOL was or wasn’t a security was noticeably absent—until Amira Valliani, the Solana Foundation’s head of policy, broke the silence during a panel titled “WTF is going on in crypto policy.”

Nearly 10 minutes into a discussion on the broader crypto regulatory context in Washington, D.C., Valliani, under the purple lights of a popular NYC concert venue, decided to “address the elephant in the room.”

“SOL is not a security,” she said. There was a smattering of applause among the crowd of developers, artists, and investors. Discussion quickly returned to the state of potential crypto legislation in Congress. Once the approximately 30-minute panel ended, Valliani asked the panelists to provide parting words to the audience.

“Keep building,” said one. Said another: “Don’t panic.”