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Cornell University's Iswar Prasad and Cornell Tech's Ari Jules on the Supreme Court's decision in Ripple v. The SEC is a partial victory for both parties, but it blurs the lines of cryptocurrency regulation in the US.
Ripple Inc. It describes itself as "a global real-time settlement system, currency exchange and money transfer network." The company's goal is certainly appropriate: to reduce the pain points of cross-border payments that are costly, time-consuming and difficult to track in real time. Ripple uses blockchain technology to enable faster cross-border payments and settlements.
To facilitate such payments, Ripple uses its own digital token XRP on the blockchain. The Securities and Exchange Commission (SEC) argued against Ripple in the District Court, stating that XRP represents a security, giving the SEC the authority to issue. The SEC accused Ripple of not complying with SEC rules for securities issuers.
United States District Judge Annalisa Torres of the Southern District of New York ruled that XRP tokens represent a security when sold directly to institutions, but not when offered directly to the public on a cryptocurrency exchange. Suleiman's decision allowed both sides to claim victory, although they were disappointed and caused some headaches by not being able to celebrate a clear victory.
The split decision represents a partial vindication of claims made about the cryptocurrency industry due to the nature of the products and services offered and a significant setback to the SEC's efforts to undermine the industry. To some extent, the decision accepts the cryptocurrency industry's claim that its products and services do not constitute securities or other conventional financial products and therefore should not be regulated.
The decision makes it more difficult for the Securities and Exchange Commission to regulate different parts of the cryptocurrency industry and forces it to take a slightly broader view of its regulatory powers. But the decision gives the SEC some room to improve its regulatory efforts, even if the goal of protecting retail investors from blatant deception by cryptocurrency sellers is now more challenging.
The idea that the SEC could reduce its regulatory powers gives some impetus to the cryptocurrency ecosystem, which is wary of stricter and possibly disruptive regulatory oversight. Soon after the decision was made, the value of most cryptocurrencies increased.
However, this decision creates confusion by stating that the definition of some cryptocurrency-related products is not based on the nature of the product, but on the buyers or end users. Although the industry wants sufficient regulation to provide legitimacy without too much interference, the industry still lacks the regulatory certainty it needs.
Different types of cryptocurrencies have subtle differences, and analyzing the implications for each decision can be a challenging task. Bitcoin is essentially decentralized cryptography and has no issuing company or agency behind it, so its decision should not be interpreted as security.
At the opposite end of the spectrum, fiat-backed stablecoin issuers like Circle's USD Coin, whose issuance and management are centralized, now face the same dilemma as XRP: whether or not their products are securities. Who buys securities and through which channel.
Sitting in the middle of this spectrum between centralization and decentralization, cryptocurrencies like XRP bear the brunt of this uncertainty.
If anything, Torres' decision will intensify the battle between advocates of cryptocurrency, who are worried about improving the functioning of financial markets, and regulators, financial stability and investor protection. Whether this decision will significantly change the battlefield remains to be seen.
SEC v. Ripple Labs Inc., SDNY, 20-cv-10832, 07/13/23
This article does not necessarily reflect the views of Bloomberg Industry Group, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Iswar Prasad is a professor of trade policy at Cornell University's Dyson School and a senior fellow at the Brookings Institution.
Ari Jules is the Jacobs Technion-Cornell Institute Professor at Cornell Tech. He is the Associate Director of the Initiative on Cryptocurrency and Contracts (IC3) and Senior Research Scientist at Chainlink Labs.
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