In every major dispute, there comes a time when you realize it’s time to settle. A ruling doesn’t go your way, a juror looks sideways at his legal team, the judge makes it clear it’s time for a conciliation conference. After Judge Analisa Torres’ decision in SEC v. Ripple, the time has come for the United States Securities and Exchange Commission to settle the rest of its case against Ripple Labs, as well as its case against Coinbase.
The SEC’s attack on cryptocurrencies has used a loose legal definition of what constitutes a security that must be registered with the SEC under a legal test established by the Supreme Court in the 1946 case SEC v. Howey. Throughout most of its history, the SEC used this tool to go after frauds and scams with little economic reality behind them. You can understand why judges tended to give the SEC the benefit of the doubt and made the test ever looser in a number of landmark fraud cases. Using this flexible proof to attach legitimate crypto projects is different, and ultimately leaves crypto projects with no way to register.
Torres ruled that sales to retail investors of the XRP token (XRP) were not necessarily linked to Ripple’s entrepreneurial endeavors as a company, and therefore failed an element of the Howey test. This is a unique cryptographic twist on Howey’s proof. Linking the investment to the business efforts of whoever is selling the interest will be more difficult in crypto because tokens do not represent an equity interest in the issuer. Therefore, the buyer of a crypto token is not as tied to the efforts of the founder of a new blockchain as equity investors in traditional companies.
Related: The Supreme Court Could Stop the SEC’s War on Crypto
This turns the SEC’s case against Coinbase on its head, and Coinbase knows it. He sent a strong message to the SEC when Coinbase relisted the XRP token just hours after Torres’ decision. This victory was only a partial victory, but it makes it very difficult for the SEC to target secondary markets in crypto securities like secondary trading on the Coinbase platform.
All of this analysis doesn’t even begin to explore the challenges the SEC will face with the Supreme Court eager to reign in administrative agencies with the evolving important questions doctrine that could dramatically reduce the SEC’s war on cryptocurrency.
People are speculating what will happen if the SEC appeals the Ripple case to the 2nd Circuit. Don’t forget that Ripple could still win everything in SCOTUS. https://t.co/MaWU940Ms1
—BlockProf (@JWVerret) July 14, 2023
The SEC’s best move now is to settle and do a deal with Coinbase. Coinbase already extended the olive branch to the SEC a year ago by filing a rulemaking request to create a tailored listing process for crypto assets. I suggested the same thing about six months earlier, after an SEC investor advisory committee hearing, which I chaired. The committee found that crypto tokens could not feasibly register with the SEC without adapting the listing process.
There is no shortage of crypto lawyers ready to work with the SEC to figure out an adaptable regulatory regime for crypto tokens. There are hundreds of securities lawyers who are SEC alumni or big law alumni working in crypto right now who could help the SEC adapt its rules in the same way that the SEC has adapted its rules in the past. for asset-backed securities, master limited partnerships, real estate investment trusts, and dozens of other hybrid assets and asset vehicles.
Related: Demand Is Driving Bitcoin Price To $130K
Many of the disclosure requirements in the SEC’s disclosure rules on boards of directors, executive compensation, shareholder proposals, and financial statements simply don’t fit crypto projects. Who would “register” Ethereum today? It has no board of directors or executive director.
What assets and liabilities would be on the balance sheet of an entity that files documents on Ethereum, given that no entity actually controls the well-decentralized Ethereum blockchain? None of that is clear.
And things that crypto asset buyers want to know, like tokenomics or audits of blockchain security or the smart contracts that underlie decentralized finance (DeFi) exchanges, aren’t mentioned in the disclosure rules. the sec.
The game of chicken that the SEC has been playing with Coinbase and Ripple must end because the SEC is about to get out of the way. There is a better path compatible with the rule of law. It’s time for the SEC to work with crypto attorneys to develop a crypto asset listing and disclosure regime that works and ditch the joyous “just walk in and sign up” talking points. This alternative approach will better protect buyers of crypto assets.
JW Verret is an Associate Professor at George Mason University Antonin Scalia School of Law. He is a practicing crypto forensic accountant and also practices securities law at Lawrence Law LLC. He is a member of the Advisory Council of the Financial Accounting Standards Board and a former member of the SEC Investor Advisory Committee. He also runs the Crypto Freedom Lab, a think tank fighting for policy change to preserve the freedom and privacy of crypto developers and users.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
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