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    Empire

    Policy Series: The Ripple Effect | Rebecca Rettig, Jake Chervinsky

    Thu Jul 20 2023
    Ripple CaseCrypto LawSECToken SalesInvestment ContractsDecentralizationRegulatory UncertaintyConsumer ProtectionRegulatory FrameworksInternational Impact

    Description

    A federal district judge ruled in favor of Ripple, stating that the SEC was wrong in their claims of unauthorized sales of securities. The court's decision challenges the SEC's perspective on tokens as securities and questions their authority as regulators. The ruling has significant implications for the crypto industry, including exchanges like Coinbase. The case highlights the distinction between tokens and transactions, emphasizing the need for transaction-by-transaction analysis. The decision also raises the importance of legislation to provide clarity and protect consumers. Other topics discussed include investment contracts, decentralization, consumer protection, and international regulatory frameworks.

    Insights

    Ripple Case Ruling

    A federal district judge ruled in favor of Ripple, stating that the SEC was wrong in their claims of unauthorized sales of securities.

    Significance of the Ripple Case

    The court ruling on the Ripple case is a significant development in crypto law.

    Opportunities for Legislation and Clarity

    Regulators and policy makers have the opportunity to pass legislation that provides clarity for crypto businesses and protects consumers.

    Implications and Future Considerations

    The SEC may or may not appeal the decision on Ripple.

    Long-Term Implications and Ripple's Legal Troubles

    The SEC may need to consider the long-term implications of their actions and whether legislation is necessary to regulate the industry.

    Token Sales and Investment Contracts

    The community can get the air drop and trade it on exchanges or DeFi protocols.

    Decentralization and Regulatory Uncertainty

    The concept of decentralization is important to consider from both a regulatory and an ethos perspective.

    Consumer Protection and Regulatory Frameworks

    Consumer protection is needed in the industry to address scams and lack of perfect information.

    Legislation and International Impact

    The market structure bill and the stablecoin bill are two pieces of legislation being discussed in Congress.

    Global Harmonization and Future Outlook

    The way the bills are written may not have a huge impact.

    Chapters

    1. Ripple Case Ruling
    2. Significance of the Ripple Case
    3. Opportunities for Legislation and Clarity
    4. Implications and Future Considerations
    5. Long-Term Implications and Ripple's Legal Troubles
    6. Token Sales and Investment Contracts
    7. Decentralization and Regulatory Uncertainty
    8. Consumer Protection and Regulatory Frameworks
    9. Legislation and International Impact
    10. Global Harmonization and Future Outlook
    Summary
    Transcript

    Ripple Case Ruling

    00:00 - 07:08

    • A federal district judge ruled in favor of Ripple, stating that the SEC was wrong in their claims of unauthorized sales of securities.
    • The court reviewed a large factual record and granted the SEC's motion in part and denied it in part.
    • Ripple engaged in sales of unregistered securities with institutional sales, but not with programmatic sales on centralized exchanges where buyers didn't know they were buying from Ripple.
    • Token distributions as payment and through grants programs were not considered sales of unregistered securities.
    • The question of whether two Ripple executives' individual XRP sales were unregistered securities is still open for trial.
    • This district court ruling is not binding precedent and only the Supreme Court or intermediate courts have binding authority.

    Significance of the Ripple Case

    06:46 - 13:41

    • The court ruling on the Ripple case is a significant development in crypto law.
    • The court states that tokens are not securities, but transactions in tokens can be depending on facts and circumstances.
    • This decision challenges the SEC's perspective that tokens embody investment contracts.
    • The court clarifies that the investment contract analysis focuses on transactions, not assets.
    • Exchanges like Coinbase, which are being targeted by the SEC, are big winners in this decision.
    • The court's ruling undermines the SEC's theory of the law and questions their authority as regulators.
    • There was skepticism from the judge regarding the SEC's case against Coinbase, especially after approving their S1 filing.
    • Many people believe that the SEC's actions have wiped out investor value and raised doubts about their role in protecting investors.
    • The judge emphasizes that XRP as a digital token does not meet the requirements of an investment contract.
    • Going forward, transaction-by-transaction analysis will be necessary to determine if an investment contract exists.

    Opportunities for Legislation and Clarity

    13:16 - 20:44

    • Regulators and policy makers have the opportunity to pass legislation that provides clarity for crypto businesses and protects consumers.
    • Chainalysis offers market intelligence and investigation support for crypto assets.
    • The industry standard for token issuers involves two transactions: one with investors in the development company and another with the public.
    • The investment contract analysis applies to the transaction between entrepreneurs and investors, but not to the tokens themselves.
    • The court's decision rejects the SEC's theory that anything with a price on a secondary market is a security.
    • Airdrops may not be viewed as securities if there was no investment of money involved.
    • It is uncertain whether the SEC or Ripple will contest the decision or if it will be challenged further.

    Implications and Future Considerations

    20:20 - 26:58

    • The SEC may or may not appeal the decision on Ripple.
    • There is a turning tide of sentiment in the industry.
    • The judge's statements in the Coinbase case were compelling.
    • Chair Gensler expressed disappointment with the decision on programmatic sales.
    • The ripple decision has implications for other discussions and bills in Congress.
    • Leaving it up to the courts may not be sufficient to resolve regulatory issues.
    • Having consistent legislation would provide clarity for the industry.

    Long-Term Implications and Ripple's Legal Troubles

    26:41 - 33:04

    • The SEC may need to consider the long-term implications of their actions and whether legislation is necessary to regulate the industry.
    • The recent court decision is embarrassing for the SEC and undermines Chair Gensler's image as a strict enforcer.
    • The SEC is unlikely to drop any ongoing cases but may be more cautious in taking on new litigation risks.
    • The SEC may argue that this decision is just one judge's opinion and that other judges may rule differently in similar cases.
    • The Ripple case highlights the distinction between the token itself and how it is sold, which can have legal implications.
    • Ripple's inability to use certain exemptions from securities laws contributed to their legal troubles.
    • Selling tokens to sophisticated institutional investors does not require the same level of disclosure as selling to a wider audience.
    • Ripple could face significant fines related to their institutional sales, potentially exceeding $200 million.
    • Settlement is unlikely, as both parties are likely unwilling to compromise.
    • Projects that came after Ripple have adopted a new framework with stricter regulations and lockups for investors.

    Token Sales and Investment Contracts

    32:54 - 39:41

    • The community can get the air drop and trade it on exchanges or DeFi protocols.
    • Teams may want to raise more money by selling tokens with lockups.
    • It depends on the circumstances whether selling tokens with lockups is problematic or not.
    • Selling tokens for a protocol you have no involvement with may be based on the circumstances.
    • The promises made in the transaction are important in determining if it's a security.
    • Not all tokens are securities, but some can be structured to have security-like features.
    • The Ripple decision does not mean no token can ever be a security.
    • Issuing a token as stock or note can make it a security.
    • People still need to pay attention to issues that could trip securities regulations.
    • The circumstances of the transaction determine if later sales of tokens are viewed as investment contracts.
    • If the development company raises money promising profit for investors, it's likely a securities transaction.
    • If the company is no longer functional and sells tokens without promises of future efforts, it may not be a securities transaction.
    • Looking at the transaction is key in determining if it's a securities transaction or not.

    Decentralization and Regulatory Uncertainty

    39:32 - 46:30

    • The concept of decentralization is important to consider from both a regulatory and an ethos perspective.
    • Enforcing regulations on decentralized autonomous organizations (DAOs) can be challenging, as seen in the case of Ooki Dow.
    • The Ripple decision does not address the issue of decentralization or provide clarity on various related issues.
    • Legislation, such as the Maconary Thompson bill, is needed to resolve regulatory uncertainty and provide clarity for the industry.
    • The bill proposes treating certain tokens as restricted digital assets and having them regulated by the SEC.
    • Once certified as decentralized, jurisdiction would move from the SEC to the CFTC for trading on a digital commodity exchange.
    • Congress needs to act to provide clarity for the industry, as court cases alone will not resolve these issues.
    • The McHenry Thompson bill aligns with some of the concepts discussed in the Ripple decision regarding token sales and lifecycle.

    Consumer Protection and Regulatory Frameworks

    46:00 - 52:43

    • Consumer protection is needed in the industry to address scams and lack of perfect information.
    • Major exchanges like Coinbase and Binance require projects to produce a set of documents for token listing.
    • Exchanges are implementing information disclosures and transparency, but they are not public for everyone to see.
    • Fear of enforcement actions prevents full disclosures, allowing scammers to thrive.
    • Clear rules would help the SEC focus on going after bad actors instead of treating everyone as guilty until proven innocent.
    • It is important to consult with a lawyer before making assumptions about behavior based on the Ripple case.
    • The McHenry Thompson bill is still in the discussion draft stage and awaiting actual text introduction.
    • The bill falls under the jurisdiction of both the House Financial Services and Agriculture Committees.
    • A markup process will determine if the bill gets reported to the full House of Representatives for voting.
    • If passed by the House, it may go to the Senate where its fate is uncertain due to party differences.
    • Time constraints and upcoming elections pose challenges for getting the bill moved this Congress.

    Legislation and International Impact

    52:17 - 59:10

    • The market structure bill and the stablecoin bill are two pieces of legislation being discussed in Congress.
    • The industry is hoping to get these bills passed before the next presidential election.
    • The stablecoin bill focuses on fiat-backed centralized stablecoin issuers, like USDC.
    • There is a positive outlook for the stablecoin bill as it creates a regulatory framework for these issuers.
    • The remaining issues being discussed are nuanced and unlikely to make the bill unworkable.
    • The stablecoin bill and market structure bill focus on centralized custodial intermediaries, not DeFi markets.
    • Regulatory frameworks for stablecoins have already been implemented in Europe and the UK.
    • Mika, a framework designed to regulate crypto assets in the EU, has been passed into law with implementing regulations still pending.
    • There are other pieces of regulation in the EU that may impact crypto and blockchain-based software separate from Mika.
    • Mika provides a roadmap for running businesses in the EU, while there is no roadmap yet in the US.
    • Other international regulations may not have a significant impact on the markup of US acts.

    Global Harmonization and Future Outlook

    58:55 - 1:05:40

    • The way the bills are written may not have a huge impact.
    • Efforts are being made to find harmony in regulations globally.
    • Other countries' actions can influence policymakers in the US.
    • Motivation to take action is crucial in Congress.
    • Getting a bill made into law is challenging.
    • Regulation is important to prevent unregulated markets or activity moving overseas.
    • Calling representatives and expressing support for crypto regulation is essential.
    • Crypto may become a bigger topic in future election cycles.
    • Politicians need to understand the importance of crypto and its impact on younger generations.
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