Expert opinion

What do recent SEC court losses mean for crypto regulation?

In the SEC vs. crypto matchup, the latter won this year after securing two landmark triumphs against the former. To the SEC, these losses are merely a hurdle in a longer race. But to crypto, celebrations continue as the two triumphs set a great precedence for any future crypto cases.

Now, the question is how recent wins affect the crypto landscape. This guide delves deeper into the implications of the rulings. However, we first need to explore the lawsuit the SEC lost. 

SEC’s killer lawsuits

Since Gary Gensler’s appointment and taking over as the SEC chair in 2021, the regulatory body has been hell-bent on killing crypto in the US, before Gensler’s appointment, the SEC had already begun its crypto attacks, filing a major suit against crypto in December 2020. 

In late 2020, the SEC filed a legal suit against one of the largest crypto networks, Ripple, for illegally issuing a security XRP token. At the time, XRP recorded growth speedily, towering over many other crypto networks. This attack slowed XRP’s initial growth, with many investors fearing the death of crypto. 

The ‘security tag’ weapon

SEC’s most potent weapon in its arsenal has always been the ‘security tag.’ After the suit against XRP, the SEC attacked several other cryptocurrencies and networks. 

Gensler, the reigning chairman, has repeatedly said that all cryptocurrencies except Bitcoin are securities. Gensler did not back his claims when asked whether he believes Ethereum is a security in front of a House committee hearing. However, in his actions, Gensler has maintained his astute belief that cryptocurrencies are securities. 

In fact, by late June 2023, the SEC had publicly called over 70 crypto assets ‘securities.’ 

So begins the end: Attacks on crypto exchanges

It appears that the SEC’s initial attacks on cryptocurrencies were just setting up a stronger attack against top exchanges. This year alone, the SEC has gone after three major crypto exchanges: Kraken, Coinbase, and Binance

The SEC sued Kraken for its crypto staking and custodial services. Instead of prolonging fights, Kraken chose to settle with the SEC simply.

The SEC went after Coinbase, with other allegations, the illegal sale of securities. The SEC mentioned 13 tokens deemed as securities listed on the exchange.

Finally, the SEC filed 13 charges against the crypto exchange network Binance and its founder, Changpeng Zhao. Among the charges include fraud and misrepresenting trading controls. 

SEC losses and how they impact crypto

XRP’s loss debunks SEC’s weapon

The SEC has lost at least twice this year against popular crypto networks. In the first landmark ruling in July, Judge Torres ruled that XRP sales must never be considered a security unless in institutional sales. The wording of the ruling means that XRP is generally not a security when the sales are between individuals. 

In institutional sales, or when the dealings are between sophisticated institutional investors, XRP sales can be termed security sales. While the ruling approved the use of Howey’s Test in determining whether an asset is a security, it disapproved of the unfair application associated with Ripple.

This landmark ruling marked the first big loss for the SEC against crypto. But what does it mean for the rest of crypto? 

Judge Torres’ ruling may set the SEC up for more future losses. But how? The wording of the verdict will give crypto advocates ammunition when dealing with crypto cases in the future. 

For instance, Coinbase lawyers can now argue that the listed tokens were mainly sold between individuals and cannot be securities. The over 70 assets called securities can use the same ruling to prove to a judge that the ‘security’ tag is unfair. 

Judge Torres's ruling renders SEC’s efforts to attack crypto projects with the ‘security’ tag weak. Imagine the SEC is losing its greatest ammunition against the crypto landscape.

In the future, crypto projects and founders will thrive without the fear that the SEC will term their tokens as securities. 

XRP's second big loss against Grayscale

Towards the end of August, the SEC recorded their second-largest loss this year against Grayscale. For some time, several top investment managing companies have been applying with futility to the SEC for the freedom to launch their own Bitcoin spot ETFs. 

One such network focused on launching a Bitcoin-focused live investment product is Grayscale. The investment company applied to the SEC to convert their investment asset GBTC into a spot Bitcoin ETF. However, the SEC rejected the application earlier this year. 

Grayscale sued the SEC for the ETF rejection. On August 29th, the Court ruled that the SEC must rescind their Grayscale ETF rejection. It is now up to the watchdog to review the application again. 

The decision occurred when many expected the SEC to approve some Bitcoin spot ETFs, including Ark Invest. So, how does this loss affect crypto?

This loss now means the SEC must exercise fairness when reviewing Bitcoin spot applications from any candidates, including Blackrock, Ark Invest, Grayscale, and more.

Final remarks

The recent court losses for the SEC signal a potential shift in the crypto regulatory landscape. These landmark rulings associated with Grayscale and Ripple bring to question the SEC’s aggressive stance against cryptocurrency.

The rulings suggest that the judicial system is becoming more receptive to crypto industry arguments.

The developments pave the way for a balanced and fair regulatory environment where cryptocurrencies can thrive without fear of arbitrary classification or legal action. These losses will either open the SEC up for even bigger losses in the future or force the regulator to focus on creating an all-inclusive regulatory framework for crypto.

It's about time regulators saw cryptocurrencies not as threats but as innovations that need transparent, fair, and constructive regulation.