Is the SEC Risking Crypto-Regulator Rights?
Will the SEC soon have no more authority over the fast-growing cryptocurrency market? This serious question is now even circulating in the mainstream media and political circles after it has been a hot topic amongst crypto enthusiasts for a while. The crypto community has been eagerly following the increasingly intense trial of strength between Ripple Labs, a silicon valley based blockchain behemoth, and the US regulator SEC. A court ruling on this could point the way to the extent to which the stock exchange supervisory authority is responsible for the crypto market at all and could be in the future.
The dispute between the SEC and Ripple Labs began in December 2020, when the US Securities and Exchange Commission accused the payment platform Ripple Labs of violating securities regulations and therefore filed a lawsuit. Allegedly, Ripple had used the associated cryptocurrency XRP to finance its core business with cross-border transactions and selling the cryptocurrency. Employing this unregistered securities offering, as the SEC deems, 1.3 billion dollars were allegedly collected.
The lawsuit surprised Ripple, who believed that XRP did not fall under the category of “securities” and that the sale was therefore not subject to authorisation. Ripple pointed out that the regulatory authority also allowed other cryptocurrencies such as Bitcoin or Ethereum to be traded like commodities, which do not have to be registered as securities. Moreover, another US financial authority, the FinCen, had already declared XRP as a “currency” in 2015 and fined Ripple because of a breach of currency regulation. Nevertheless, the SEC now interfered, and in the most bizarre way.
On his last day in office, ex SEC chairman Jay Clayton filed the lawsuit before walking out the door. However, Ripple’s lawyers and the very active XRP community continues to produce evidence, pointing towards corruption within the SEC. It is believed that ex-chair Clayton and ex-director William Hinman had picked winners and losers behind closed doors. Many data, files, videos, and other evidence have subsequently been collected and handed over to Judge Torres, handling the case. One XRP community member even created a dedicated website that provides a lot of information and data surrounding the case and the SEC’s missteps in chronological order.
The SEC has countered that the situation with XRP is different than with Bitcoin and Ether. After all, the token “created by Ripple Labs” was actively used to finance Ripple’s business. Thus, it represents an investment in the company itself, which makes XRP security that falls under the SEC’s supervision. However, even this argument is utterly false because XRP was not launched by Ripple but was created and then donated by a company called OpenCoin to Ripple Labs many years ago.
The lawsuit against Ripple has added even more uncertainty to the ongoing debate about whether cryptocurrencies should be treated as securities, like commodities, or something entirely new. This distinction is important because securities must be authorised and regulated by the SEC in the USA, and affected companies must also disclose certain information to the SEC.
The SEC under its new head Gary Gensler is taking a sharp line against the crypto industry. The authority feels responsible for cryptocurrencies and exchanges to ensure the protection of investors. Against this background, it becomes clear that the dispute between the SEC and Ripple must be viewed in the larger context. Market participants hope that the ruling will provide more clarity about what the crypto industry can expect from the SEC and the US judiciary in the future.
Documents under lock and key
But now there has been an exciting development. According to numerous sources, the two parties have agreed out of court that certain documents requested as evidence by the other side will remain under seal. This could indicate that a settlement is in the offing, which means that the lawsuit against Ripple could not be used as a precedent in the future.