The Regulation Of Digital Assets (Cryptocurrencies) and Access to Justice: The Ripple vs. SEC Case
Roland Amoussou
Partner at Vovan Trocadelyo Group, Open to international arbitration counsel and arbitrator mission in Thailand and globally
In Brief
The ongoing legal battle between Ripple Labs and the U.S. Securities and Exchange Commission (SEC) has garnered significant attention and raised important questions about access to justice and the regulation of emerging technologies, particularly cryptocurrencies. With the case lasting for three years and costing over $200 million, it has become a focal point for discussions surrounding the stifling of innovation, regulatory bias, and potential corruption within the SEC.
This article explores the implications of the Ripple vs. SEC case on digital assets regulations, highlighting the need for a fair and transparent regulatory framework to foster technological advancement with clear and predictable rules.
Overview of the Case
The case revolves around the question of whether Ripple's non-registered security token, XRP, should be classified as a security or a commodity.
The SEC alleges that Ripple sold XRP as an unregistered security, violating securities laws.
There are more details about this case at Investopedia.
SEC's Legal Strategy
The SEC has been employing a strategy of regulation by enforcement, targeting companies after the fact rather than providing clear regulatory guidelines. The SEC approach is like a baker being charged by law enforcement for smuggling a bag of flour on the accusation that the flour which is destined to be used to bake bread and cake looks like cocaine! This policy has created uncertainty in the industry, stifling innovation and hindering companies' ability to comply with regulations.
Social Costs and Political Implications
The prolonged and costly nature of the case, lasting for three years and costing over $200 million, raises concerns about access to justice and the social impact of such a flawed regulatory approach.
The case has exposed potential bias, corruption, and the need for regulatory reforms to ensure a fair and transparent process.
The Howey Test and Its Implications
Under the US legal framework, the Howey Test is crucial in determining whether a particular asset or transaction falls under securities regulations. Its interpretation plays a pivotal role in defining investment contracts and assessing the regulatory status of cryptocurrencies like XRP.
The recent US Supreme Court decision has significant implications for Ripple's case.
The Supreme Court ruled that it would not simply apply the factors from an old case (1946) but instead adapt them to current conditions by considering the underlying statute. In other words, the Supreme Court aligns indirectly with the position of countries such as Thailand where Digital Assets are considered a new asset class!
This aligns with Ripple’s argument that the “Howey Test” should accommodate emerging technologies like cryptocurrency.
The decision clarified the application of the Howey Test, which determines whether an investment contract exists.
Ripple sees the Supreme Court decision as a win for their defense, suggesting that XRP does not meet the criteria of an investment contract under the Howey Test.
Access to Justice, Cost of Litigation, And Implication for Digital Assets Business
As already mentioned, the prolonged legal battle between Ripple and the SEC has resulted in significant financial costs, exceeding $200 million.
Such costs pose barriers to access to justice, particularly for smaller companies or individuals with limited resources.
Lengthy legal proceedings can limit access to justice by prolonging the resolution of disputes and placing a burden not only on the parties involved (Transaction Cost) but also on society (Social cost).
Efforts should be made to ensure a more streamlined and efficient legal process. A more efficient legal system would help reduce costs, expedite resolution, and improve access to justice for all parties involved in such cases which will benefit society at large.
Dark Practices, Regulatory Bias, and Stifling Innovation
The recent questioning of the General Counsel of the SEC by the US Congress has exposed the dark practices of the SEC.
Some critics argue that the SEC's enforcement actions exhibit bias and selective targeting, potentially stifling innovation in the cryptocurrency industry.
The way the SEC complaint against Ripple Labs was written suggested that the token itself was security, which was strongly disputed by the crypto community and especially XRP holders.
The disagreement with the SEC rose suspicion that the crypto regulatory body was not really concerned by the situation of the retail investors but has some hidden agenda. The situation created an uprising that culminated in a class action of 11000 XRP holders, led by prominent crypto lawyers such as Jeremy Hogan and John Dean.
Alleged Corruption And "Dirty Laundry"
The SEC's legal "guerilla strategy" was so despised that the regulatory entity started to be called names, and accused of corruption pointing at facts such as:
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The SEC losing its case against Ripple will have very damaging consequences on the trust required to regulate the crypto space and the probable resignation of its current chairman, Gary Gensler.
Why Crypto Companies Are Leaving the US?
The perception of bias is eroding trust and hinders the growth of emerging technologies in the US. The SEC's actions and regulatory uncertainty have a chilling effect on innovation, as companies are choosing to avoid U.S. markets or relocate to more crypto-friendly jurisdictions.
A comparative analysis of these jurisdictions can shed light on the benefits they offer, including regulatory clarity, progressive policies, and government support for emerging technologies.
The departure of crypto companies from the United States highlights the need for regulatory reforms to maintain the country's competitiveness and leadership in the global innovation landscape that allowed the Ecommerce revolution 20 years ago.
There is a reason why leading crypto companies are leaving the US to establish themselves in more friendly and forward-thinking countries like Singapore, Hong Kong, Vietnam, Japan, Korea, and Switzerland.
Balancing Investor Protection and Innovation
Instead of regulation by enforcement or by litigation, regulatory agencies such as the SEC's mandate should be to create regulatory frameworks that should strike a balance between investor protection and fostering innovation.
Collaborative efforts between regulators, industry stakeholders, and policymakers are crucial to ensure that regulations support technological advancement without stifling it.
Congressional Response and Calls for SEC Accountability
There is an increasing focus on the SEC's enforcement actions and legal strategies, particularly in the context of emerging technologies like cryptocurrencies.
Critics argue that the SEC's approach has been heavy-handed, lacking transparency, and potentially stifling innovation in the industry.
As Lawmakers, Congress has a vital role to play in addressing the regulatory challenges faced by emerging technologies. They can create legislation that provides regulatory clarity, establishes clear guidelines for the industry, and ensures a fair and balanced approach to enforcement.
It is crucial for regulators, policymakers, industry stakeholders, and Congress to adopt a collaborative and forward-thinking approach to regulation.
By engaging in constructive dialogue, seeking input from various stakeholders, and staying updated with technological advancements, regulations can be designed to protect investors while encouraging innovation.
Conclusion:
The SEC vs. Ripple lawsuit is not just a battle of power and control, between a private and a public entity, It carries significant implications for the entire digital assets market in the United States and beyond.
However, there are lingering questions regarding potential hidden government agendas that have yet to be unveiled to the public. As the lawsuit unfolds, it is crucial to remain vigilant and explore any potential connections between the case and the U.S. government's development of its own cryptocurrency, the Central Bank Digital Currency (CBDC), or digital dollar issued directly by the Federal Reserve (Fed).
The launch of a CBDC has been a topic of discussion and speculation, and if true, it could disrupt the existing cryptocurrency landscape. Understanding the potential interplay between the Ripple lawsuit and the government's CBDC initiative requires further investigation and analysis, which will be addressed in an upcoming article.
The irony of the Ripple Vs. SEC case is that such litigation would have been totally unnecessary, and millions of USD taxpayer's money would have been saved, if a regulation similar to Thailand's "Emergy Decree on Digital Assets Business Operation" (2018) were adopted!
The US regulators and the US SEC would have learned something by collaborating with Thailand's lawmakers and regulatory bodies regarding how to regulate digital assets:-).
By staying informed and engaged, we can navigate these developments and contribute to shaping a regulatory environment that balances government objectives with the principles of fairness, access to justice, and a thriving global cryptocurrency market.
End
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