The recent court ruling declaring that Ripple Labs‘s XRP token should not be considered a security when sold to the public on digital asset exchanges has sparked excitement within the cryptocurrency industry.
The verdict has brought some hope for clarity in the regulatory landscape surrounding cryptocurrencies. However, despite this victory for Ripple and the crypto community, the fight for clear crypto regulations is far from over.
Judge Rules XRP Is Not Security When Sold to Public in Landmark Case
Two weeks ago, Southern District of New York judge Analisa Torres ruled that the XRP token is not a security when sold to the general public. However, she did mention that it can be treated as a security for past XRP sales to institutional clients.
This verdict was seen as a win for both Ripple Labs and the crypto community, giving them some leverage in the ongoing battle for regulatory clarity. But Ripple’s chief legal officer, Stu Alderoty, has cautioned that the fight is not yet won.
The Securities and Exchange Commission (SEC) has expressed disagreement with the court’s ruling. In legal documents for a separate case against Terraform Labs, the SEC claimed that the ruling was “wrongly decided” and that the court should not follow it. The agency also stated that it is considering other options for further review.
"It was a big big win for Ripple and a big big win for the #crypto community," says @novogratz after a judge ruled $XRP is not a security. "Let's not let Gary Gensler put lipstick on a pig. They lost and they know it." pic.twitter.com/sUwjQ2mJ5b
— Squawk Box (@SquawkCNBC) July 20, 2023
Furthermore, on 9 August, the SEC sought permission to appeal parts of the decision, claiming that there are multiple other pending court cases that could be affected depending on the appeal’s outcome.
“These two issues involve controlling questions of law on which there is substantial ground for differences of opinion, as reflected by an intra-district split that has already developed.”
However, Alderoty believes the judge made the correct decision based on the law. He said on a recent episode of TechCrunch’s Chain Reaction podcast:
“We think the judge got that right, and we think that was a faithful application of the law, and I think a court of appeals will not only affirm that but maybe even amplify that to even a greater extent.”
He expressed the hope that other judges will see the SEC’s position as misguided and will take inspiration from the judge’s decision in the Ripple case. However, he emphasized that the focus should be on creating the best regulatory framework to protect the integrity of the market.
Without a comprehensive regulatory framework, the United States risks losing its advantage in blockchain innovation and falling behind other countries in the crypto industry. He added:
“Without that, I don’t think the crypto industry and the technology behind it, the brilliant entrepreneurs that are driving it, will be able to really realize the full potential of this technology in the U.S., and it’s going to continue to move offshore.”
SEC’s Regulation by Enforcement in the US Drives Away Crypto
After some prominent bankruptcies in the cryptocurrency industry, including the failures of FTX and BlockFi, regulatory agencies in the United States began adopting a more hostile stance. Specifically, the CFTC and SEC took aggressive measures against the crypto industry.
In March, the CFTC filed a lawsuit against Binance and its founder Changpeng “CZ” Zhao, alleging that the exchange knowingly provided unregistered crypto derivative products in violation of the law. Similarly, the SEC reached a settlement with Kraken to cease offering staking services to clients in the country and pay $30 million in fines.
More recently, the SEC sued both Binance and Coinbase, two of the world’s largest cryptocurrency exchanges, for selling unregistered securities and other alleged misconduct.
Meanwhile, crypto companies are not waiting for the resolution of these cases. Many major U.S.-based crypto companies are considering relocating to more favorable countries.
Coinbase has already established a presence in Bermuda and may launch an international exchange. Additionally, Bittrex, formerly based in Seattle, has ceased operations in the U.S., and Gemini, another large U.S. exchange, is contemplating a move to the United Arab Emirates.
According to an April report by Electric Capital, the U.S.’s share of blockchain developers has been declining over the past five years. This decline, dropping from 40% in 2017 to 29% in 2020, suggests that the regulatory uncertainty in the U.S. might be driving crypto away.
What Happens If the SEC’s Appeal Wins or Loses?
While the recent court ruling in favor of Ripple Labs has generated positive sentiment within the crypto community, the fight for clear crypto regulations is ongoing. The SEC’s disagreement and potential appeal show that there are still hurdles to overcome.
Will The SEC Appeal? @JohnEDeaton1 pic.twitter.com/za231sIOdE
— Digital Asset Investor.XRP (@digitalassetbuy) July 25, 2023
If the SEC’s appeal wins, it would strengthen the commission’s position and affirm its assertion that XRP is a security. This outcome would likely lead to stricter regulations and potentially severe consequences for other cryptocurrencies that share similarities with XRP.
On the other hand, if the SEC’s appeal fails and they lose the case against Ripple Labs, it would be a significant blow to its authority and jurisdiction over the digital asset sector. Such a loss would indicate that the SEC’s current regulatory framework may be insufficient or inappropriate for the evolving crypto landscape.
Furthermore, if the SEC faces a defeat, the agency may have to recalibrate its approach to regulating cryptocurrencies. It could push the commission to reconsider its classification of various tokens and encourage it to revise the existing regulatory framework or extend a new one specifically for cryptocurrencies.
This may involve engaging in dialogue with industry experts, lawmakers, and market participants to develop a more inclusive and effective regulatory system.
Nevertheless, the lawsuit has, for one, highlighted the need for clearer regulations within the crypto space. Whichever party prevails, it is expected that this case will prompt the SEC to provide more comprehensive guidelines for the industry, whether it be through new precedents from successful lawsuits or changes to the guidelines themselves.
“[The ruling] underscores the need for regulatory clarity and consistent standards across different types of participants and transactions,” said David Shargel, partner at Bracewell LLP.
“The distinction will continue to fuel questions about the legalities and regulatory frameworks surrounding cryptocurrency sales and distribution.”
