In light of recent developments, it is imperative for the U.S. Securities and Exchange Commission (SEC) to settle its cases against Coinbase and Ripple Labs. The SEC’s aggressive stance on cryptocurrencies has utilized a broad legal definition of securities, established by the Supreme Court’s Howey test in 1946. Historically, the SEC employed this tool to combat blatant scams and frauds lacking economic substance. However, applying the same flexible test to legitimate crypto projects leaves them without a viable means of registration.
Judge Analisa Torres’ ruling in SEC v. Ripple introduced a unique twist to the Howey test in the context of cryptocurrency. She concluded that sales of XRP tokens did not necessarily correlate with the entrepreneurial efforts of Ripple as a firm, failing one element of the test. This distinction arises from the fact that tokens do not represent equity interests in issuers, making it harder to link investments to the founder’s efforts in blockchain-based ventures.
This ruling turns the tables on the SEC’s case against Coinbase, which promptly relisted the XRP token following Torres’ decision. By doing so, Coinbase sent a clear message to the SEC, indicating the difficulties the regulatory agency would face when targeting secondary markets for crypto securities. Moreover, the SEC faces additional challenges from the Supreme Court’s inclination to curb administrative agencies using the evolving major questions doctrine, potentially limiting its crypto crackdown.
To navigate these complexities and find a way forward, the SEC should consider settling and striking a deal with Coinbase. Coinbase had already extended an olive branch to the SEC by filing a rulemaking request to create an adapted listing process for crypto assets. Numerous crypto lawyers, including SEC alumni and those from reputable law firms, are well-equipped to work with the SEC in developing an adaptive regulatory framework for crypto tokens. Similar adaptations have been made in the past for various hybrid assets.
Current SEC disclosure rules designed for traditional securities are ill-suited for crypto projects. For example, Ethereum, a decentralized blockchain without a board or CEO, would face challenges regarding registration and balance sheet reporting. Moreover, relevant aspects like tokenomics, audits of blockchain security, and smart contracts fueling decentralized finance (DeFi) exchanges are not covered by SEC disclosure requirements.
Continuing the confrontational approach between the SEC and Coinbase/Ripple will prove detrimental to the SEC’s interests. Instead, the SEC should collaborate with crypto lawyers to establish a practical listing and disclosure regime for crypto assets. This alternative path would ensure better protection for crypto asset buyers while upholding the rule of law.
J.W. Verret, an associate professor at George Mason University’s Antonin Scalia Law School and a practicing crypto forensic accountant, suggests that it is time for the SEC to embrace this new approach. Verret is also a member of the Financial Accounting Standards Board’s Advisory Council and a former member of the SEC Investor Advisory Committee. His views expressed here are his own and do not necessarily represent those of Cointelegraph.