The Securities and Exchange Commission (SEC) has been on a rollercoaster regarding regulating cryptocurrencies. Successive chairmen from both parties have led the agency down an unpredictable path. Instead of opting for clear rulemaking and engaging with the public, they’ve pursued a contentious approach targeting specific crypto entities. Now, this strategy is revealing fractures within the SEC’s foundations.
In a game-changing development, Ripple Labs, a prominent blockchain company, secured a major legal victory against the SEC last month. The SEC had accused the cryptocurrency XRP of being an investment contract within the Ripple ecosystem, classifying all XRP sales, including those on secondary markets, as unregistered securities. However, Judge Analisa Torres delivered a verdict that only early institutional XRP sales explicitly designed as investment contracts fell under the SEC’s jurisdiction.
Renowned crypto enthusiast Mr. Huber has pointed out an intriguing observation by Ripple. They’ve noted that the SEC is applying the Howey test to all cryptocurrencies except Ethereum. This observation raises questions about potential influences within Ethereum’s circle and whether Ethereum’s dominance results from inadvertent missteps rather than unethical dealings.
According to a recent report, the legal nuance surrounding XRP’s classification significantly affects the $1 trillion cryptocurrency industry. SEC Chairman Gary Gensler had anchored the agency’s regulatory efforts on the XRP case. Although the SEC is challenging the ruling on appeal, legal experts anticipate a formidable battle ahead. Appellate courts have increasingly resisted federal agencies overstepping their congressionally defined boundaries.
It’s essential to recognize that the SEC’s ambitious regulatory approach in cryptocurrency predates Chairman Gensler. The Ripple case was initiated by his predecessor, Republican Jay Clayton, on the final day of his tenure. Astonishingly, both Democratic commissioners joined Clayton in filing the lawsuit just before he departed office.
As the legal proceedings surrounding Ripple unfolded, the discovery process unveiled internal chaos and perplexity within the SEC regarding cryptocurrency regulation. Internal emails and documents within the agency shed light on the events leading up to William Hinman’s 2018 speech on cryptocurrency at the Yahoo Finance conference. During this speech, Hinman seemed to favor specific cryptocurrencies, contending that tokens like Ethereum’s ether, deemed “sufficiently decentralized”, did not meet the criteria for being securities.
The release of these emails also heightened concerns about conflicts of interest within the SEC. Joseph Lubin, the billionaire co-founder of Ethereum, appeared to influence Hinman’s speech. Lubin had engaged with Hinman months before the speech, held multiple meetings with him and SEC staff, and presented arguments aligned with Hinman’s perspective on network decentralization.
Despite advice from the SEC’s Office of General Counsel to speak in broader terms and avoid specific references to Ethereum, Hinman chose to disregard this counsel. The SEC cautioned that Lubin’s arguments did not conform to securities law, creating a potential “regulatory gap” that could bewilder the markets.
