Who Will Regulate Crypto if not the SEC?
The cryptocurrency developer Ripple Labs just won a legal victory against the U.S. Securities and Exchange Commission (SEC) that should provoke cheers from the entire industry, at least those that prefer that digital currency not be treated as a security. If crypto is not viewed as a security, the jurisdiction which the SEC has been pushing hard to cement, may fall apart. This ruling may eventually lead to any future legal framework for digital tokens being designed by the U.S. Congress.
Background
Ripple is a technology company that uses cryptocurrency and blockchain technology to offer financial solutions. Ripple and XRP are two distinct entities. Ripple is a fintech company that builds global payment systems, while XRP is an independent digital asset that can be used by anyone for a variety of reasons.
In 2020, Ripple was charged by the SEC on the grounds that the company illegally raised $1.38 billion in unregistered securities offerings. In a ruling on July 13 of this year, it was decided by a Federal court that Ripple Labs did not violate securities law by selling its XRP tokens on its exchange. This is being seen as the first major setback for the SEC in a decade of enforcement against the cryptocurrency industry. Other crypto firms accused of illegally operating digital asset exchanges can now explore ways to take advantage of the ruling.
This is an important decision that may alter the expected path of the entire industry. The SEC and the cryptocurrency industry which includes exchanges, crypto-mining, and the tokens themselves, have been at odds, with increasing heat on the industry, mainly by the SEC. Gary Gensler, who chairs the SEC, has described the crypto market as a “Wild West” riddled with fraud. He claims that most crypto tokens are securities. The regulator has been cracking down on crypto exchanges, including the top U.S. exchange Coinbase. If crypto is considered a security, it will fall under the commission’s oversight.
What this Means for the Crypto Industry
Crypto firms have long disputed the SEC’s jurisdiction but until last week had no supporting precedence from a court. This win provides much needed ammunition for the industry to reassert its claims.
U.S. District Judge Analisa Torres in New York ruled that sales on public cryptocurrency exchanges were not offers of securities because purchasers did not have a reasonable expectation of profit that depended on anything Ripple did. This profit expectation was used as a key in determining if XRP was a security at the time.
Crypto supporters are viewing the decision as a watershed and the judge’s reasoning as a new line of defense for the others being targeted by the SEC, such as Coinbase, Binance, and Bittrex.
SEC APPEAL?
It remains to be seen whether the SEC will challenge the ruling in the 2nd U.S. Court of Appeals which could cause judges to delay hearing other pending and new cases that other crypto assets sold on exchanges are not securities.
Ripple Chief Legal Officer Stuart Alderoty said in an interview with Reuters that the company “wouldn’t shy away from an appeal, because the judge was right on her core findings,” adding: “I believe any appellate court looking at this would amplify and endorse those rulings, which would certainly be welcome.”
An appeal is somewhat risky for the SEC. If the 2nd Circuit, whose rulings are binding on federal courts in New York, Connecticut and Vermont, adopts the logic in the Ripple ruling, other cases like the SEC vs. Coinbase case would leave the SEC without much of an argument. This could permanently eliminate any claim the Commission has to regulation over the industry.
With the district court having taken a sledgehammer to the main claim the SEC had to oversight, the industry may find itself subject to a legislative agreement. Especially with an SEC deprived of the argument that their legal cases were sound, there’s nothing to stop an acceleration of efforts to find a bipartisan agreement on a regulatory framework for crypto assets by the legislative branch.
Managing Editor, Channelchek
Sources
