SEC v. Crypto: The Concluding Chapters of a Never-Ending Saga?
- INTRODUCTION
The recent news that SEC issued a Wells notice (preluding formal charges) to OpenSea, the popular NFT marketplace, adds yet another chapter to the legal saga that has been gripping the blockchain industry for years.
As it’s well known, the SEC’s historical position is that “everything, other than Bitcoin, is a security” — including, based on the notification to OpenSea, NFTs. The debate of whether crypto assets are securities or commodities is crucial: it determines whether the SEC or the CTFC is responsible for their regulation. Essentially, it’s a judicial exercise in understanding what can be treated as a “security”, as defined back in 1946: hence why it’s so difficult to apply to modern technologies like cryptocurrencies. The resulting uncertainty and lack of regulatory coherence has been the main cap on growth for the crypto industry, as it culls rate of adoption, R&D, financing, etc.
Careful investors have noticed how recent judicial developments show that the SEC has not been able to convince the courts — and the chances of it succeeding by seeking further lawsuits, are waning.
2. SEC v CONSENSYS
A. Post-ETH 2.0
In June 2024, the SEC dropped investigations into Consensys regarding Ethereum 2.0 (where the blockchain transitioned to proof of stake). As per Consensys’ own announcement “this means the SEC will not bring charges alleging the sales of ETH are security transactions”. That was certainly good news — but sagacious observers preferred to wait for clarity on SEC investigations regarding Consensys’ pre- ETH 2.0 transactions and Ripple.
Today, optimism is warranted on those fronts too.
B. Pre-ETH 2.0
The SEC could still investigate Consensys for Ethereum transactions before its transition to proof of stake (i.e., the proof of work era). For investors, it’s not the lawsuit per se that may be concerning — it’s the contents: an SEC lawsuit against Consensys over proof of work activities could contain details deemed alarming for ETH investors, on whether those can be deemed securities.
Fortunately, such a lawsuit appears less likely by the day for two reasons:
- crypto has become a polarising, politicised topic that neither presidential candidate would trifle with, and;
- the approval of the spot Ethereum ETF can plausibly be seen as the final word on the “security vs commodity” debate.
3. SEC v RIPPLE
A. A Nuanced Verdict
In August 2024, Judge Torres issued a landmark ruling, determining that Ripple’s sales of its token (XRP) to institutional investors were unregistered securities offerings. Whilst it led to a $125m civil penalty, this was heralded as a success, given the reduction from the $2.5bn requested by the SEC.
Furthermore, the court’s ruling that secondary sales of XRP on exchanges were not securities transactions, was seen as a victory both for Ripple and all cryptocurrencies.
However, it’s a Pyrrhic victory: Judge Torres’s ruling acknowledges that XRP could be considered a security in some contexts — but it is not a blanket security across all transactions. This highlights the complexities of applying traditional (read “unreformed”) securities laws to crypto and allows future SEC actions under different circumstances.
B. Legal Implications
- Is the case over? Probably not. Both parties have until October 6 to appeal. Ripple will, presumably, pocket the “win” and not appeal. The SEC is, instead, likely to appeal (indeed, it tried to appeal before the trial was even over, in August 2023 — unsurprisingly, Judge Torres denied it). While it’s likely that a court of appeal would uphold Judge Torres’s unorthodox ruling, there is no guarantee.
- Binding Precedent? Unlike what’s often misreported in the media, it’s important to note that this ruling does not have binding authority (not until and if the court of appeal approves it). It’s just as important to note, on the other hand, that the momentum is clearly positive: in fact, other judges cited SEC v Ripple in other cases (e.g., in relation to the BNB token, the Ripple ruling was cited in SEC v Binance, in the defendant’s favor, July 2024).
- What About Other Altcoins? Even if the Ripple case concluded with a binding precedent, it would still leave most other altcoins exposed: in fact, XRP is an exception in never having had an ICO and its consensus isn’t based on proof of stake.
4. SEC’S SHIFTING APPROACH
The Consensys and Ripple cases can be viewed as significant challenges to the SEC’s enforcement strategy, particularly in its approach to seeking broad penalties and enforcing compliance within the cryptocurrency sector.
A. Political Support
Both cases occurred amid increasing political scrutiny over the SEC’s regulatory stance on crypto. Pundits often overlook the fact that the SEC is an independent regulator, supposedly impervious to political influence. Nonetheless, sparked by the elections, we’ve seen an uncharacteristically bipartisan push in Congress to limit the SEC’s authority and provide clearer regulatory guidelines.
Even notable Democrats like Pelosi and Schumer broke ranks with the Biden administration by supporting legislation that would bring regulatory clarity to the crypto industry and reduce the SEC’s broad enforcement discretion. Meanwhile, Trump criticised the current administration’s handling of the SEC and even suggested firing Gary Gensler if re-elected — even though US presidents don’t have authority to fire an SEC chairman.
B. A Series of Legal Setbacks
The SEC’s regulatory actions in the crypto space have faced significant legal challenges. Shortly after the Consensys and Ripple cases, in fact, the court of appeals ruled that the SEC acted “arbitrarily and capriciously” in denying Grayscale’s application for a spot Bitcoin ETF, raising questions about the agency’s decision-making process. The SEC faced public scrutiny after dropping charges against Ripple’s co-founders. A few weeks later it was reprimanded by a Utah court for “gross abuse of power” in a case involving another crypto project. The SEC also seems to be encountering similar challenges in its case against Coinbase.
These events, along with the SEC ultimately and reluctantly approving the BTC and ETH spot ETFs, suggest a shift in the SEC’s approach.
5. CONCLUSION: TURNING POINT?
The Consensys and Ripple cases are far from conclusive victories but mark a turning point in the struggle between the SEC and crypto. They highlight the need for clear legislation to lay down the foundations upon which case law may develop: given the industry’s embryonic stage, relying on case-by-case court decisions would stunt crypto’s long-term growth.
Although the SEC may consider appealing and other cases continue to unfold, the emerging trend is in favor of the technology. This is the result of judicial developments, politicisation of the topic and the indisputable success (not just financial) of the spot ETFs.
In this context, even if the SEC were to follow up on its notification to OpenSea with a lawsuit, one may be forgiven for ascribing it to vigor mortis. Whilst uncertainty is the only constant, regardless of the outcome of November’s elections, institutional investors can now legitimately expect the judicial developments considered here, to finally unleash the regulatory clarity they’ve been waiting for years.
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