“What Ripple did was mark the end of a phase in crypto [of] This idea that the SEC can solve the tough questions of crypto,” said Justin Slaughter, a former SEC and CFTC official who is now director of policy at Paradigm, a major crypto investor. “For those of us who have read it carefully, the cracks in this approach have been apparent from the beginning. It is a house built on a poor foundation, but, now, it is clear to all.
In the past year, the SEC has cracked down heavily on crypto, sparking fears among Democrats in Congress that some of the world’s biggest digital asset firms, such as Binance, Coinbase and Kraken, are involved in fraud and mismanagement and lack consumer protections. . Gensler and the agency say most of the thousands of tokens in circulation are unregistered securities that must be regulated like stocks and bonds, and are backed by nearly perfect records in the courts — until now.
Torres’ decision clears the way for a new power struggle between the SEC and crypto.
A judge in the SEC’s own court, the Southern District of New York, found that Ripple violated securities laws by not registering the XRP token in a $728 million sale to institutional investors. However, in what is seen as the biggest loss yet to Washington’s broader crypto enforcement campaign, Torres also said that in other cases — when investors buy XRP on a crypto exchange — the token is not covered by securities laws.
“The SEC has suffered a major loss here,” Ripple Chief Legal Officer Stu Alterotti said in an interview. “Their regulatory-enforcement strategies that crippled the crypto economy in the U.S. are undermined by this decision.”
Coinbase, America’s largest crypto exchange, says the decision is an additional pillar in its defense against SEC charges that the company must comply with the same rules that govern the New York Stock Exchange and Nasdaq. Anonymity was granted to discuss internal conversations.
After the ruling, an SEC spokesman said the agency was reviewing the decision and that it was “pleased” with parts of the case. This includes Torres’ decision to confirm that the current test for determining whether an asset is an investment contract and therefore still applies to crypto under the SEC’s oversight. Gensler and the SEC have long argued that investors need the full protection of securities laws or face significant disadvantage.
“There’s a lot of risk that any individual investor takes when looking at these markets,” Gensler said on a call with reporters Wednesday.
The SEC has been fending off attacks on its authority over crypto for some time. In Congress, lawmakers such as House Financial Services Chair Patrick McHenry (RN.C.) and Agriculture Chairman GT Thompson (R-Penn.), have introduced legislation that would impose new restrictions around the SEC’s ability to monitor the entire market. Sens. Cynthia Lummia (R-Wyo.) and Kirsten Gillibrand (DN.Y.) on Wednesday released updated legislation requiring crypto exchanges to register with the CFTC.
Some securities advocates were quick to blast Torres’ 34-page opinion. Tyler Gellasch, a former SEC official, warned Thursday that the ruling could inadvertently reverberate into other corners of finance, such as over-the-counter stocks.
Others said the decision to split Torres would mean venture capital firms, hedge funds and other sophisticated investors are protected by securities laws — while everyday investors who trade crypto exchanges are not.
Ann Lipton, a law professor at Tulane University, said: “It’s irrelevant on its face. “Any lawyer could look at it and say it doesn’t make sense. It doesn’t strike me as much for the world.”
Ultimately, the SEC may appeal the decision, Lipton said. He added that although some of the SEC’s charges against Ripple executives are now set to go to trial in late 2020, the agency, and Ripple, may apply to do so soon.
The appeal, whenever it comes, could be critical to the SEC’s enforcement campaign in crypto. However, in the meantime, the company is not entirely in the clear. A panel of U.S. federal appeals judges is expected to rule soon on a lawsuit filed by Grayscale Investments against the SEC challenging the agency’s decision to reject its bid to launch a bitcoin-tracking exchange-traded fund.
“The SEC’s position right now is weak,” Slaughter said. “Another bad decision can have a ripple effect.”