“What Ripple has done is the end of a phase in cryptography [of] This notion that the SEC can solve hard questions about cryptocurrency on its own, said Justin Slaughter, a former SEC and CFTC official who is now director of policy at venture capital firm Paradigm, a major cryptocurrency investor. . “For those of us who have studied this carefully, the holes in this approach were obvious from the start. It was a house on a bad foundation, but now, I think, it’s obvious to everyone.”
Over the past year, the Securities and Exchange Commission (SEC) has waged a sweeping crackdown on cryptocurrency that has netted the world’s largest digital asset companies Binance, Coinbase and Kraken, alleging fraud and mismanagement at some of the companies, and raising concerns from congressional Democrats about a lack of consumer protection. . Gensler and the agency were driven by their belief that most of the thousands of tokens in circulation are unregistered securities that should be regulated like stocks and bonds, and they’ve been backed up with a near perfect record in the courts – so far.
Torres’ decision paves the way for a new power struggle between the SEC and cryptocurrency.
The judge, who is based in the SEC’s Principal Court for the Southern District of New York, found that Ripple violated securities laws by failing to register XRP in $728 million worth of sales to institutional investors. However, in what is seen as the biggest loss yet to the broader crypto enforcement campaign in Washington, Torres also said that in other cases — such as when investors buy XRP on a crypto exchange — the token is not subject to securities laws.
“The SEC here has suffered a huge loss,” Stu Aldrotti, Ripple’s chief legal officer, said in an interview. “The regulation-by-enforcement strategies that have crippled the cryptocurrency economy in the United States have been humbled by this decision.”
Coinbase, the largest cryptocurrency exchange in the United States, says the decision represents an additional pillar in its defense against the SEC’s claims that the company must comply with the same rules that govern the NYSE and Nasdaq, according to a person familiar with the exchange’s thinking. Anonymity was granted to discuss internal conversations.
In the immediate aftermath of the ruling, an SEC spokesperson said the agency was reviewing the decision and was “pleased” with parts of the case. This includes Torres’ decision to maintain that the current test for determining whether an asset is an investment contract, and therefore still subject to SEC oversight of cryptocurrencies. Gensler and the SEC have long argued that investors need the full protection of securities laws or they’ll be in very bad shape.
“There are a lot of risks to any investor when they look at these markets,” Gensler said Wednesday on a call with reporters.
The Securities and Exchange Commission (SEC) has been battling attacks on its authority over cryptocurrencies for some time. In Congress, legislators, such as the House Speaker of Financial Services Patrick McHenry (R-N.) Also on Wednesday, Sens. Cynthia Lumia (R-WY) and Kirsten Gillibrand (D-N.Y) passed revamped legislation requiring cryptocurrency exchanges to register with the CFTC.
Some securities attorneys were quick to criticize Torres’ 34-page opinion. Tyler Gelach, a former SEC official, warned Thursday that the ruling could inadvertently reverberate in other parts of finance, such as over-the-counter stocks.
Others said that Torres’ separate decision would mean that venture capital firms, hedge funds and other savvy investors are protected by securities laws — while ordinary investors who trade on cryptocurrency exchanges are not.
“He’s incoherent in his face,” said Ann Lipton, a law professor at Tulane University. Any lawyer can look at this and say it doesn’t make sense. It doesn’t seem very tall to me for this world.”
Ultimately, Lipton said, the Securities and Exchange Commission can appeal the decision. She added that the agency, as well as Ripple, could apply to do so in the near term despite the fact that some of the charges brought by the SEC in late 2020 against Ripple executives will now go to trial.
This call, when it comes, could be critical to the campaign to force the SEC on cryptocurrencies. In the meantime, the agency may not be entirely out of the blue. A panel of federal appeals judges in the United States is expected to rule soon on a lawsuit Grayscale Investments brought against the Securities and Exchange Commission, challenging the agency’s decision to reject its bid to launch a bitcoin-tracking ETF.
“The SEC’s position is weak at the moment,” Slaughter said. “Another bad decision that could have a ripple effect.”
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