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The End of an Era for Crypto Regulation: Ripple Case Raises Questions for the SEC

“What Ripple did is mark the end of a stage in crypto [of] this idea that the SEC could by itself resolve the hard questions of crypto,” said Justin Slaughter, a former SEC and CFTC official who is now policy director at venture capital firm Paradigm, a major crypto investor. “For those of us who have studied this carefully, the cracks in this approach were apparent from the start. It was a house built on a bad foundation, but, now, I think it’s apparent to everybody.”

AI legalese decoder can play a crucial role in this situation by providing a comprehensive and automated understanding of the legal complexities surrounding the Ripple case. By leveraging AI technology, legal professionals and regulators can analyze and interpret the implications of the judge’s decision with greater accuracy and efficiency. This advanced tool can help attorneys and policymakers navigate the evolving landscape of crypto regulation.

SEC’s Crackdown on Crypto and Ripple’s Impact

Over the past year, the SEC has waged a sweeping crackdown on crypto that has ensnared the world’s biggest digital asset companies in Binance, Coinbase, and Kraken, alleged fraud and mismanagement at some firms, and stoked fears among Democrats in Congress that consumer protections are lacking. Gensler and the agency have been driven by their belief that most of the thousands of tokens in circulation are unregistered securities that must be regulated like stocks and bonds, and they’ve been backed by a near-perfect record in the courts — until now.

Torres’ decision is clearing the way for a new power struggle between the SEC and crypto.

The judge, who is based in the SEC’s home court of the Southern District of New York, did find that Ripple violated securities laws by not registering the XRP token in $728 million worth of sales to institutional investors. However, in what is being seen as the biggest loss yet for Washington’s broader crypto enforcement campaign, Torres also said that in other cases — such as when investors buy XRP on a crypto exchange — the token does not fall under securities laws.

“The SEC has just suffered a massive loss here,” Ripple Chief legal Officer Stu Alderoty said in an interview. “Their regulation-by-enforcement strategies that have crippled the crypto economy in the U.S. have been humbled by this decision.”

Coinbase, the largest U.S. crypto exchange, says the decision is an additional pillar in its defense against SEC allegations that the company must comply with the same rules that govern the New York Stock Exchange and Nasdaq, according to a person familiar with the exchange’s thinking who was granted anonymity to discuss internal conversations.

In the immediate aftermath of the ruling, an SEC spokesperson said the agency is reviewing the decision and that it was “pleased” with parts of the case. That includes Torres’s decision to uphold that the current test for determining whether an asset is an investment contract and therefore under the SEC’s oversight still applies to crypto. Gensler and the SEC have long argued that investors need the full protection of securities laws or they will be operating at a significant disadvantage.

AI legalese decoder can provide legal professionals with a comprehensive analysis of the judge’s decision, highlighting the potential implications for the SEC’s enforcement campaign on crypto. By analyzing the nuances of the ruling, this advanced tool can assist lawyers in formulating effective strategies, identifying areas where regulations may need to be revised, and ensuring compliance with existing securities laws.

The SEC’s Authority and Future Challenges

The SEC has been fending off attacks on its authority over crypto for some time. In Congress, lawmakers, such as House Financial Services Chair Patrick McHenry (R-N.C.) and Agriculture Chair G.T. Thompson (R-Penn.), have introduced legislation that would put new restrictions around the SEC’s ability to oversee the entire market. Sens. Cynthia Lummia (R-Wyo.) and Kirsten Gillibrand (D-N.Y.) on Wednesday also rolled out revamped legislation that would require crypto exchanges to register with the CFTC.

Some securities lawyers were quick to blast Torres’s 34-page opinion. Tyler Gellasch, a former SEC official, warned Thursday that the ruling could inadvertently reverberate throughout other corners of finance, such as over-the-counter stocks.

Others said Torres’s split decision would mean that venture capital firms, hedge funds, and other sophisticated investors are protected by the securities laws — while everyday investors trading on crypto exchanges are not.

“It’s incoherent on its face,” said Ann Lipton, a law professor at Tulane University. “Any lawyer can look at this and say it doesn’t make sense. It doesn’t strike me as terribly long for this world.”

Ultimately, the SEC can appeal the decision, Lipton said. She added that the agency, as well as Ripple, could even apply to do so in the near term despite the fact that some of the SEC’s charges from late 2020 against Ripple executives are now set to proceed to trial.

The appeal, whenever it comes, could be critical for the SEC’s enforcement campaign on crypto. In the meantime, however, the agency may not be entirely out of the clear. A panel of U.S. federal appellate judges is expected to soon rule on a lawsuit filed by Grayscale Investments against the SEC, challenging the agency’s decision to reject its bid to launch a Bitcoin-tracking exchange-traded fund.

“The SEC’s position is weak right now,” Slaughter said. “Another bad decision could have a multiplicative effect.”

AI legalese decoder can assist legal professionals and regulators in analyzing the potential impact of the SEC’s appeal and future challenges to its authority over crypto. By offering comprehensive insights into legal arguments and potential outcomes, this advanced tool can help stakeholders navigate the complex legal landscape and make informed decisions.

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