April 13, 2024

Why the Ripple case has a huge impact on the whole crypto industry

On Thursday, news spread rapidly through Crypto Twitter, Slack, Discord, and Telegram that a federal judge from the United States District Court for the Southern District of New York had reviewed the U.S. Securities and Exchange Commission’s (SEC) case against Ripple Labs and found it lacking in many aspects.

The SEC, in its public comments on the decision, attempted to put on a brave face by highlighting the court’s agreement that certain contracts for XRP tokens between Ripple and institutional investors were securities under the “Howey test.” However, the SEC conveniently ignored the damaging aspects of the decision that challenge its current approach to cryptocurrencies. The unexpected outcome of the case surprised many, as Ripple was expected to face significant losses that could have had repercussions for other players in the crypto market.

The case was considered a straightforward one for the SEC, as Ripple had raised funds by selling tokens to the public and promoted XRP as a valuable asset. However, the court’s ruling indicated that Ripple did not violate the Securities Act of 1933 and that XRP was not proven to be a security. This raises questions about the SEC’s ability to convince other courts that tokens are securities or that crypto trading in the secondary market should be regulated.

While the decision does not serve as a blanket repudiation of the SEC’s legal theories on cryptocurrencies and does not signal the end of Gary Gensler’s chairmanship, it is a blow to the SEC’s enforcement strategy. The SEC’s regulation-by-enforcement approach will become increasingly challenging as token issuers, exchanges, and software developers gain confidence to fight back against the agency’s actions.

The Ripple decision also strengthens the crypto community’s belief that the SEC’s legal theory is flawed and its tactics improper. It calls for Congress to take action and establish a regulatory framework that aligns with the technology, similar to what other countries have done. The decision highlights the need for legislation to define the SEC’s mandate and fill the regulatory gap in the crypto industry.

Despite the setback, it is unlikely that the SEC will change its tough stance on crypto. Chairman Gary Gensler is expected to double down on enforcement to demonstrate strength and maintain his tough cop persona. The Ripple decision may serve as a wake-up call for Congress to address the regulatory challenges in the crypto industry and put valid concerns to rest.

In the coming months, the SEC’s strategy and approach will continue to shape the crypto landscape, and the industry will closely watch how Congress responds to the call for legislative action.