It’s Time for the SEC to Settle with Coinbase and Ripple

In every major lawsuit, there comes a moment when you realize it’s time to settle. A verdict doesn’t go your way, a juror bypasses your legal team, the judge makes it clear it’s time for a settlement conference. Following Judge Analisa Torres’ Ruling in SEC v. Ripple, The time has come for the United States Securities and Exchange Commission to settle its remaining case against Ripple Labs – as well as against Coinbase.

The SEC’s attack on crypto has used a flexible legal definition of what constitutes a security that must be registered with the SEC under a legal test established by the Supreme Court in the 1946 SEC v. Howe case. For most of its history, the SEC used this tool to go after outright frauds and scams that had little economic reality behind them. You can understand why the judges gave the SEC the benefit of the doubt and made the trial more flexible in a series of historic scam cases. Using this flexible test to engage legitimate crypto projects is different and eventually, there is no way for crypto projects to be registered.

Torres ruled that the sale of XRP (XRP) tokens to retail investors was not necessarily connected to Ripple’s entrepreneurial endeavors as a firm and, thus, failed an element of the Howe test. This is a unique crypto twist on the Howe test. Linking investment to the entrepreneurial endeavors of whoever is selling an interest in crypto is going to be difficult because the tokens do not represent an equity interest in the issuer. Thus, the buyer of crypto tokens is not as closely tied to the efforts of the founder of the new blockchain as equity investors in traditional firms.

Connected: The Supreme Court Could Stop the SEC’s War on Crypto

This turns the SEC’s case against Coinbase upside down – and Coinbase knows it. When Coinbase re-listed the XRP token within hours of Torres’ decision, it sent a strong message to the SEC. The victory was only a partial victory, but it makes it much more difficult for the SEC to target secondary markets in crypto securities, such as secondary trading on Coinbase’s platform.

All of this analysis doesn’t even begin to address the challenges the SEC will face as the Supreme Court looks to rule on administrative agencies, with emerging key questions of doctrine that could dramatically reduce the SEC’s war on crypto. Can

People are speculating what will happen if the SEC appeals the Ripple case to the second circuit. Don’t forget that Ripple may still win outright in SCOTUS. https://t.co/MaWU940Ms1

— BlockProof (@JWVerret) 14 July 2023

The SEC’s best move now is to compromise and strike a deal with Coinbase. Coinbase extended an olive branch to the SEC just over a year ago by filing a request for rulemaking to create an optimized listing process for crypto assets. I suggested the same thing about six months ago after hearings on the SEC’s Investor Advisory Committee — which I chaired. The committee found that crypto tokens could not possibly register with the SEC without optimization of the listing process.

There is no shortage of crypto lawyers willing to work with the SEC to find an adaptive regulatory regime for crypto tokens. There are hundreds of securities attorneys who are SEC alumni or larger law alumnus working in crypto right now who can help the SEC adapt its rules in the same way that the SEC has done in the past with asset-backed securities, The Master has adapted its rules for limited partnerships. real estate investment trusts and dozens of other hybrid assets and asset vehicles.

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Many of the disclosure requirements in the SEC’s disclosure rules regarding board of directors, executive compensation, shareholder proposals and financial statements do not fit crypto projects. Who Will “Register” Ethereum Today? It has no board and no CEO.

What assets and liabilities would be on the balance sheet of an entity filing documents regarding Ethereum, given that no entity actually controls the decentralized Ethereum blockchain for good? None of this is clear.

And things crypto asset buyers might want to know, such as the tokenomics or audits of blockchain security or the underlying smart contracts of decentralized finance (DeFi) exchanges, are not mentioned in the SEC disclosure rules.

The game of chicken that the SEC is playing with Coinbase and Ripple needs to end because the SEC is about to run out of business. There is a better way, in line with the rule of law. It’s time for the SEC to work with crypto lawyers to develop a workable crypto asset listing and disclosure regime and move away from the “just come and register” thing. This alternative approach will better protect crypto asset buyers.

This article is for general information purposes and should not be construed as legal or investment advice. The views, opinions and opinions expressed here are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.