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    Unchained

    Why the SEC vs. Ripple Order Is Now About 2 Things: Coinbase and Congress

    Tue Jul 18 2023
    SECRippleXRPsecuritiescrypto regulation

    Description

    The episode discusses the recent order in the SEC versus Ripple case, where Judge Annalie Satoras ruled that sales of XRP to institutional investors qualified as unregistered securities offerings, but programmatic sales did not qualify. The decision is seen as an extraordinary victory for the industry and may influence new legislation regarding jurisdiction in markets for the SEC or CFTC. The episode also explores the implications of the decision on other tokens named as securities by the SEC and the need for clear regulation and rules in the crypto industry.

    Insights

    Tokens are not considered securities

    The court rejected the theory that digital assets embody investment contracts. Tokens themselves are not considered securities; focus should be on transactions, not tokens.

    Implications for other tokens

    The recent order from the SEC stating that Ripple's XRP is not a security could help other tokens named as securities by the SEC. Tokens that followed modern industry standards and complied with securities laws during their initial distribution are less likely to have securities compliance obligations.

    Need for legislation

    The Ripple decision does not provide absolute clarity on every issue, so legislation is still needed for real clarity on token issuance and regulation. The SEC will continue to enforce regulations despite the Ripple decision, so legislation is necessary.

    Bills in Congress

    There are two bills being discussed in Congress related to crypto regulation. The first bill is a comprehensive one covering various issues in the crypto industry, while the second bill splits jurisdiction over different parts of crypto market structure between the SEC and CFTC.

    Optimism for crypto legislation

    There is optimism that crypto legislation will be passed by Congress within the next calendar year. There is a bipartisan consensus that this legislation is necessary and the framework is right.

    Chapters

    1. Arbitrums leading layer 2 scaling solutions provide lightning fast transactions at a fraction of the cost.
    2. The order in the SEC versus Ripple case is being celebrated by the industry.
    3. The court rejected the theory that digital assets embody investment contracts.
    4. Appealing the judge's decision would require seeking permission and could take a long time.
    5. Judge Torres defines programmatic sales as Ripple selling XRP on digital asset exchanges programmatically or through trading algorithms.
    6. Preston Byrne argues that the expectation of profit prong in the Howey test doesn't require an expectation of profit as a result of the efforts of the seller, but rather the efforts of another.
    7. The podcast discusses various topics including the convergence of crypto and AI, web3 gaming, NFTs in the metaverse, DeFi, scalability, interoperability, and more.
    8. The SEC does not have the authority to unilaterally decide that securities laws apply to new types of assets and technologies.
    9. US crypto exchanges may feel good about relisting XRP after the SEC's extreme view that all digital assets except Bitcoin are securities
    10. The recent order from the SEC stating that Ripple's XRP is not a security could help other tokens named as securities by the SEC.
    11. The SEC would need to go through a number of hoops and get other judges involved for there to be an appeal that would occur faster.
    12. There is a bill focused on cryptocurrency and a stable coin bill moving through the House Financial Services Committee.
    Summary
    Transcript

    Arbitrums leading layer 2 scaling solutions provide lightning fast transactions at a fraction of the cost.

    00:00 - 07:13

    • Asia's buzzing and everyone's going to token 2049 Singapore on September 13th to 14th.

    The order in the SEC versus Ripple case is being celebrated by the industry.

    00:00 - 07:13

    • Judge Annalie Satoras ruled that sales of XRP to institutional investors qualified as unregistered securities offerings, but programmatic sales did not qualify.
    • The industry sees this decision as an extraordinary victory and a win for advancing the right view of securities laws.
    • The decision may influence new legislation regarding jurisdiction in markets for the SEC or CFTC.
    • Ripple had strong arguments on its fair notice defense and a novel theory of the Howie Test, which could be overturned on appeal.

    The court rejected the theory that digital assets embody investment contracts.

    06:46 - 14:02

    • Tokens themselves are not considered securities; focus should be on transactions, not tokens.
    • The SEC's view that the crypto industry is non-compliant is rebutted by this decision.
    • The order is significant and has implications for the lawsuit's progress in the courts.
    • The SEC has not signaled an intention to appeal at this time.
    • An appeal would likely happen months or years from now, followed by a decision from the circuit court.
    • Judge Torres does not hint at this issue going up on appeal in her order.
    • The impact of this decision now and for the foreseeable future is clear: tokens are not securities and new legislation may be needed.

    Appealing the judge's decision would require seeking permission and could take a long time.

    13:33 - 21:06

    • A trial could be scheduled relatively soon, but a resolution may take six months or longer.
    • Appeals typically take at least a year or more to reach a resolution.
    • An order is the judge's written decision, while a judgment is the final paper that can be appealed.
    • The judge's order on institutional sales does not suggest a path to registration like Reg A+.
    • The order focuses on the transaction between seller and purchaser rather than the asset itself.
    • The order provides guidance on how to avoid tripping securities laws when distributing tokens.
    • Rushing directly to the secondary market without proper transactions is not encouraged by this opinion.

    Judge Torres defines programmatic sales as Ripple selling XRP on digital asset exchanges programmatically or through trading algorithms.

    20:52 - 28:18

    • The sales were blind bid-asked transactions on exchanges, similar to a typical secondary market.
    • Berenberg, an investment bank, stated that the ruling only referred to Ripple's sales on exchanges and did not address other kinds of secondary sales.
    • The court explicitly stated that it is not addressing the question of secondary market transactions.
    • However, the court recognized that programmatic sales logic applies more broadly and has broad ramifications for the industry.
    • Transactions involving truly third parties are farther away from being considered securities transactions.
    • XRP itself is not a security, but transactions in XRP could be securities depending on the facts and circumstances surrounding them.
    • Even Ripple's transactions into the secondary market were not securities transactions.
    • The court argues that ordinary assets like gold, silver, and sugar may be sold as investment contracts depending on the circumstances of those sales.
    • In today's crypto markets with trades between total strangers, it would be hard to imply an investment contract in those trades.
    • An argument was made that any token part of a Form D filing would be considered a security, but this does not make sense according to the judge's opinion.

    Preston Byrne argues that the expectation of profit prong in the Howey test doesn't require an expectation of profit as a result of the efforts of the seller, but rather the efforts of another.

    27:51 - 34:49

    • XRP's principal promoter has always been Ripple Labs, regardless of whether purchasers were aware they were buying tokens from Ripple Labs or not.
    • The judge in this case was looking at the objective nature of the Howey test and concluded that Ripple was not making promises to buyers, therefore there was no reasonable expectation on their efforts.
    • The blind bid-ask concept could be raised in relation to the common enterprise requirement, but it wasn't addressed here.
    • Securities laws are meant to apply to the economic reality, not just the formalistic structure of a transaction.
    • There needs to be a limiting principle so that any random third party cannot stand in the shoes of the original creator of an asset.
    • The decision is thin and lacks detail on this issue, possibly due to lack of evidence presented by the SEC during discovery and motion for summary judgment.

    The podcast discusses various topics including the convergence of crypto and AI, web3 gaming, NFTs in the metaverse, DeFi, scalability, interoperability, and more.

    34:34 - 41:54

    • There are discount offers for regular tickets to Token2049 conference and Crypto.com app mentioned in the transcript.
    • The conversation shifts to discussing the model of initial token creators swapping out for other companies to ensure token success.
    • The guests mention Ethereum as an example where an initial company issued the token and later a nonprofit developed the network.
    • They discuss whether this model is a way to skirt securities laws or if it depends on the facts and circumstances of each project.
    • Moving assets from company structures to foundations can provide comfort that assets will be secured and used to promote the protocol without benefiting specific beneficiaries.
    • The discussion highlights how Ripple differs from other tokens in terms of its history and potential classification as a security.
    • They mention Coinbase's rating system giving XRP a rating close to a security.
    • The guests discuss XRP's position in the wider crypto universe and whether it leans closer to being classified as a security based on the Howey test.
    • They bring up the major questions doctrine which states that an agency does not have authority to regulate a market unless Congress has given clear delegation of that authority.
    • The SEC's application of old laws created in the early 1900s to new types of assets like cryptocurrencies is questioned.

    The SEC does not have the authority to unilaterally decide that securities laws apply to new types of assets and technologies.

    41:33 - 48:42

    • The Supreme Court will likely determine how digital assets should be regulated, as it is a major question of economic and political significance.
    • When considering XRP as an asset in the market, it's important to look at Ripple's transactions and compare them with modern industry practices.
    • Brad Garlinghouse and Chris Larson were named in the lawsuit, but their personal sales were not considered securities transactions.
    • Crypto exchanges like Coinbase may benefit from this order, as it rejects the SEC's theory that assets themselves are securities.
    • Secondary market transactions on exchanges are different from securities transactions due to the lack of promises between transacting parties.
    • This order is not binding precedent and other judges could have different opinions on similar cases.
    • Exchanges should still exercise caution despite this order being a strong indicator that XRP is not a security.

    US crypto exchanges may feel good about relisting XRP after the SEC's extreme view that all digital assets except Bitcoin are securities

    48:26 - 55:23

    • Tokens themselves are not securities, so exchanges creating markets for those tokens may not be required to register as securities exchanges
    • Opinion argues that SEC Chair Gary Gensler should recuse himself from enforcement actions in crypto due to his preconceived notion that all digital assets are securities
    • Chair Gensler's response suggests there is merit to the argument
    • Certain cases like Kik, Telegram, and XRP indicate where the US might end up on regulating crypto tokens
    • The logic of the XRP case has broader ramifications compared to other cases like Library and Telegram
    • Current US regulatory stance is that tokens themselves are not securities, but issuances or sales can be depending on the terms
    • Subsequent sales cannot be assumed to be investment contracts just because the initial sale was one
    • The XRP order may have implications for tokens like SOL and MAGIC named as securities by the SEC

    The recent order from the SEC stating that Ripple's XRP is not a security could help other tokens named as securities by the SEC.

    54:59 - 1:02:21

    • Tokens that followed modern industry standards and complied with securities laws during their initial distribution are less likely to have securities compliance obligations.
    • The character of tokens in commerce provides comfort that most tokens will not be viewed as securities.
    • Institutional sales component still presents risk for projects that sold tokens in their own initial sales.
    • Two bills introduced in Congress addressing market structure legislation have a higher chance of getting passed due to the Ripple decision.
    • The Ripple decision does not provide absolute clarity on every issue, so legislation is still needed for real clarity on token issuance and regulation.
    • The SEC will continue to enforce regulations despite the Ripple decision, so legislation is necessary.
    • The order refutes the SEC's claim that no new legislation is necessary and should refocus efforts on Congress to get something done.
    • Clear regulation and rules that make sense for the industry are needed, as existing rules do not apply as the SEC was trying to apply them.

    The SEC would need to go through a number of hoops and get other judges involved for there to be an appeal that would occur faster.

    1:02:03 - 1:09:17

    • This current decision is going to stand, which could compel Congress to act faster.
    • There are two bills being discussed in Congress related to crypto regulation.
    • The first bill is a comprehensive one from Senators Lummus and Gillibrand, covering various issues in the crypto industry.
    • The second bill, the digital asset market structure discussion draft, splits jurisdiction over different parts of crypto market structure between the SEC and CFTC.
    • Tokens initially created and distributed will be treated as restricted digital assets under the purview of the SEC.
    • The bill proposes a tailored regulatory regime that addresses risks while an asset is treated as restricted.
    • Assets can be traded on SEC regulated alternative trading systems.
    • A network underlying an asset can be certified as decentralized, after which it becomes a digital commodity under the jurisdiction of the CFTC.
    • The bill aims to provide clarity and a framework for the industry without having to rely on court battles with the SEC.
    • Both bills may not need to be reconciled if they pass independently in their respective chambers.
    • Chairman McHenry's bill has more momentum behind it and is expected to move forward with some influence from the Lummus-Gillibrand bill.
    • Washington is focused on these bills along with a separate stable coin bill moving through the House Financial Services Committee.

    There is a bill focused on cryptocurrency and a stable coin bill moving through the House Financial Services Committee.

    1:08:48 - 1:11:21

    • The outcome of these bills will be interesting to see in the coming weeks.
    • There is optimism that crypto legislation will be passed by Congress within the next calendar year.
    • There is a bipartisan consensus that this legislation is necessary and the framework is right.
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