Regulation straddles the fine line between art and science — and getting the right mix of “spirit” and “letter” of new codes of conduct and operations, for businesses at least, is seldom a seamless process.
So it is with the cryptocurrency space, where public listings are picking up steam, and investors and speculators are clamoring for bitcoin and even “joke” coins like Dogecoin.
Along the way, the old debate rages, yet to be settled — and we wonder if it will be settled to anyone’s satisfaction: Are the digital offerings securities? Currencies? An asset or a utility?
Some of those most basic existential questions are on display in the Securities and Exchange Commission’s suit against Ripple Labs. As reported at the end of last year, the SEC filed suit against the firm, holding that Ripple’s XRP digital coin is a security and is thus subject to regulation. Ripple, alleged the SEC, had misled investors by selling more than $1 billion without registering with the SEC. Ripple, in turn, maintains that XRP is used as a medium of exchange, used in transactions, moving between jurisdictions, and thus is not defined as a security (and cannot be treated as such by the SEC).
Winners And Losers?
As noted in this space, Ripple alleges that the SEC’s move “amounts to picking winners and losers” in the field, as fellow cryptocurrencies like bitcoin and Ether have not been subjected to such regulations. Back in December, at the same time the suit was filed, Ripple CEO Brad Garlinghouse (named as a defendant in the suit) said the SEC’s move is “an attack on the entire crypto industry and American innovation.”
The Wall Street Journal reported that confusion marks the debate over how to classify cryptos — and that “regulators harm investors by filing suits before setting clear rules.” The Journal noted that court findings in the discovery phase of the Ripple suit “have highlighted the inconsistency” of the SEC’s approach to how it defines cryptocurrencies. Earlier this year Magistrate Judge Sarah Netburn, the financial publication said, told lawyers that Ripple “has a utility” — which stand in contrast to the SEC’s claim that the tokens are used in anticipation of and claiming profits. Yet separately, the SEC has said that bitcoin and Ether, two dominant offerings in the crypto space, are not securities, as their developers are not profiting on their sales. That distinction seems to rest on statements made by former SEC Chairman Jay Clayton.
There may, or may not be, clarity on the horizon now that there’s a newly confirmed SEC chairman, Gary Gensler. He has said cryptos will be a priority under his watch. We note that in the absence (thus far) of clearly defined rules on crypto, Gensler’s pronouncements, like Clayton’s before him, may serve as “placeholders” in how stakeholders will view cryptos.
The SEC has signaled at least some thinking about cryptocurrencies — perhaps even that the approach will be a bit hands-off moving forward. In an example, earlier this month, Hester Peirce, an SEC commissioner, debuted a Token Safe Harbor Proposal 2.0 — which would give network developers a three-year “grace period” where they would be exempt from registration provision of federal securities laws as they develop functional or decentralized networks. There would, at the end of the three-year period, be an exit report that “would include either an analysis by outside counsel explaining why the network is decentralized or functional, or an announcement that the tokens will be registered under the Securities Exchange Act of 1934.”
With new faces at the regulator, the same debate rages over what cryptos do and what they are — and holders and developers wait with bated breath.
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