A federal district court issued a much-anticipated summary judgment in the U.S. Securities and Exchange Commission’s (SEC) lawsuit against Ripple Labs and its two founders. The ruling found that Ripple’s direct sales of its cryptocurrency XRP to institutional investors constituted securities offerings, consistent with earlier cases applying securities laws to initial coin offerings (ICOs). But the ruling did not extend the scope of securities laws to Ripple and its founders’ sales of XRP to individuals through certain crypto asset trading platforms, a blow to the SEC.
Many see blockchain and cryptocurrency as a breakthrough technology that will unleash creativity, while others see it as just another internet fad.
No matter how you look at it, it’s indisputable that consumers and entrepreneurs in the emerging cryptocurrency and Web3 spaces face significant regulatory uncertainty, which impedes legitimate industry development and breeds bad behavior.
Recently, a federal district court issued a much-anticipated summary judgment in the U.S. Securities and Exchange Commission (SEC) lawsuit against Ripple Labs and its two founders. The ruling held that Ripple's direct sales of its crypto asset XRP to institutional investors constituted a securities offering, which is consistent with earlier cases applying securities laws to initial coin offerings (ICOs). However, the ruling did not extend the scope of securities laws to Ripple and its founders' sales of XRP to individuals through certain crypto asset trading platforms, which is a blow to the SEC.
While this is a potentially major victory for cryptocurrencies and a blow to the U.S. Securities and Exchange Commission’s (SEC) continued “provocations,” the ruling also brings about a series of confusing consequences for an industry that has long been plagued by regulatory uncertainty.
What decision should entrepreneurs make? For one thing, the ruling is not the final word on the issue. That means entrepreneurs may choose to continue current industry practice, where crypto-asset issuers rely primarily on the useful but incomplete decentralized framework the SEC began offering in 2019, a process that could mitigate some of the risks crypto-assets pose to consumers. But even some members of the SEC have sought to distance themselves from the framework, which has proven not clear or strong enough to be effective.
On the other hand, the ruling opens up a completely different path for crypto issuers as it stipulates that crypto sales on trading platforms are not subject to securities laws. But the ruling also contradicts the SEC’s recent actions against several major crypto exchanges, including Coinbase.
Ultimately, this ruling shows that the rules are simply not clear. In the absence of clear rules, the SEC’s current approach to cryptocurrency enforcement is harming innovation in the United States.
This uncertainty has long slowed innovation and served as a breeding ground for bad behavior. Responsible players have been impacted by regulatory enforcement actions, while ill-intentioned companies have launched products that blatantly violate long-standing rules—often beyond the reach of U.S. authorities—until disaster strikes.
Unfortunately, the situation is not getting better, it is likely to get worse unless Congress acts quickly.
Applying 80-year-old cases to new technologies presents significant challenges. The unique benefits and risks of blockchain and cryptocurrencies require new regulatory approaches. Legitimate innovators and consumers of new products need clear rules to build products with utility that are safe to buy and use, and with use cases that extend far beyond financial speculation.
The only way forward is through thoughtful, carefully crafted legislation that protects consumers from scams while still embracing the innovation of blockchain technology. Other countries around the world have proven this conclusion: the United States is falling behind.
So how can we keep up with the times and avoid more confusion and uncertainty? We recommend that U.S. lawmakers do three things:
First, ensure that both consumers and investors are protected by requiring centralized firms to register and be regulated. Regulators should investigate risks arising from custodial relationships, conflicts of interest, and the use of crypto assets in illicit finance. We have already seen many examples of such regulatory failures.
Second, any legislation should provide a compliant path for those that continue to build decentralized networks and legitimate businesses in this uncertain environment.
Finally, laws and regulations should appropriately incentivize decentralization and community ownership—key features of cryptocurrencies and blockchain technology—to enable this technology to create real benefits for the public and the next generation of the Internet.
There are some hopeful signs: both the House and Senate have made progress on such legislation. Reps. Patrick McHenry (R-NC) and G.T. Thompson (R-PA) and Senators Cynthia Lummis (R-WY) and Kristen Gillbrand (D-NY) have sought to achieve meaningful consumer protections through a legislative framework that promotes responsible innovation. We urge Congress to consider and pass such legislation before it’s too late.
