The Sec Must Settle the Dispute Between Coinbase and Ripple
In any major legal dispute, there comes a time when you decide to settle. The judge will let you know that if a jury gives your team a sidelong glance, or if a decision isn’t to your liking, it’s time to hold a comparison session. Following the decision of Judge Analisa in SEC V. Ripple the U.S. Securities and Exchange Commission has decided to drop the remaining case against RippleLabs and Coinbase.
In its attack on crypto, the SEC relied on a flexible legal interpretation of what constitutes an asset that must be registered with the SEC, under a legal test provided in the SEC v. Howey of the Supreme Court in 1946. Throughout its history, the SEC has used this tool to combat open scams and scams that had little or no economic basis. It’s easy to see why over the years judges have favored the SEC when in doubt and the test has become more flexible. This flexible test is used to attach legitimate crypto projects, which is different. As a result, crypto projects no longer have the opportunity to register.
Torres noted that the sale of the XRP token (XRP) to retail investors was unrelated to Ripple’s corporate endeavors and an element of Howey’s was absent. This is an original crypto variant of the Howey test. With cryptocurrencies, it will be more difficult to link the investment to the entrepreneurial efforts of the seller, as tokens do not represent equity in the issuer. The buyer of a cryptocurrency token is therefore not as closely associated with the founders of new blockchains as equity investors.
The SEC’s case is now reversed — and Coinbase knows it. Coinbase sent a strong message to the SEC by declaring the XRP coin re-listed within hours of Torres’ decision. It was a partial victory, but it made it difficult for the SEC’s efforts to target secondary cryptocurrency markets such as secondary trading on Coinbase.
This analysis is only a small part of the SEC’s challenges. The Supreme Court will be keen to rein in administrative agencies with its evolving doctrine on key issues that could drastically contain the SEC’s crypto war.
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The SEC should now settle with Coinbase and reach an agreement. Coinbase filed a request for regulation a year earlier to create a customized listing process. About six months ago, I proposed the same thing after a hearing by an investor advisory committee that I chaired. The committee concluded that crypto tokens could not be registered with the SEC unless the listing process was adjusted.
Crypto lawyers are ready to help the SEC develop a regulatory framework for crypto tokens. There are currently hundreds of securities attorneys who are SEC or major law firm graduates working in the crypto space. They could help the SEC adjust its rules, just as it has historically done with asset-backed securities and master limited partnerships, real estate investment trusts, and dozens of hybrid assets and wealth vehicles.
Crypto projects simply don’t meet many of the SEC’s disclosure requirements for directors, executive salaries, shareholder proposals, and financial reports. Who would “register Ethereum” today? There is no board or CEO.
What assets and liabilities will be included on the balance sheet of a company filing documents on Ethereum since Ethereum is decentralized? It is unclear.
The SEC rules do not mention things that buyers of crypto assets are interested in, such as tokenomics, blockchain security audits or smart contracts underlying decentralized finance (DeFi) exchanges. The SEC needs to stop messing around with Coinbase and Ripple because it is about to get out of hand. There is another way to comply with the rule of law.
It is time for the SEC and crypto attorneys to work together to create a working crypto asset listing and transparency system. The SEC should stop the “just register and come in” talk and instead work together to develop an effective system for listing and disclosing crypto assets. This alternative approach better protects buyers of crypto assets.
JW Verret Associate Professor at the Antonin Scalia Law School, George Mason University. He is also a securities attorney with Lawrence Law LLC. He is a former member of the SEC Investor Advisory Committee and a member of the Financial Accounting Standards Board Advisory Council. He is also the head of the Crypto Freedom Lab. This think tank fights for policy changes to protect the freedom and anonymity of crypto developers.
This article is provided for general information and should not be construed as investment or legal advice. The author’s views, opinions, and thoughts are his own and do not necessarily reflect those of AskFX.
