Regulation
What will happen for the regulation of cryptocurrencies? Look at the courts
The question of how to do it regulate cryptocurrency has largely been the subject of a war between two agencies: the Securities and Exchange Commission (SEC) wants to govern digital currencies like any stock or bond listed on a public exchange, while the Commodity Futures Trading Commission (CFTC), aims to regulate Bitcoin and Ethereum as commodities, such as beef or wheat.
But the regulatory moves are unlikely to spur swift action by Congress any time soon. Rather, it is more likely that final action on how to govern the volatile and troubled cryptocurrency industry will come from cases that reach the courts this year. That’s according to lawyers at Reed Smith, an international law firm based in New York.
“Congress is asleep across the board, so they’re not solving this,” says Mark Bini, a partner at Reed Smith and a former federal prosecutor.
Rather, legal proceedings currently underway through the Second Circuit Court of Appeals – the circuit in the Southern District of New York that largely provides oversight in financial matters – could go a long way in providing decisive action. The last few years have given rise to a cascade of high profile scandals AND corporate implosions in the world of cryptocurrencies, so it’s no wonder there’s a flurry of court activity this year. However, the decisions made so far have created a mixed bag of results that both regulators and cryptocurrency advocates have celebrated.
Among the cases that appear poised to potentially influence regulation are Ripple and Coinbase’s respective lawsuits with the SEC.
CoinBase, the cryptocurrency exchange founded by Brian Armstrong, was sued by the SEC in 2023 for operating illegally in the United States and accused of failing to register as a broker and national stock exchange. THE the agency wrote that the company, founded in San Francisco in 2012, “deprived investors of significant protections, including SEC inspection, recordkeeping requirements and safeguards against conflicts of interest.” Armstrong has long called for regulatory oversight of cryptocurrencies, as he says this would help support the entire industry. But he directly called the SEC’s enforcement tactics aggressive: “The SEC has just gone down this path of regulation through enforcement or harassment, if you will, where every startup in the industry gets a subpoena or a Wells notice and that doesn’t it’s sustainable,” he said last September. He and Coinbase have toed the industry line that cryptocurrencies are commodities, not securities, and should be regulated by the CFTC.
Ripple, a blockchain developer accused by the SEC of selling unregistered securities in a 2020 lawsuit, has received a partial victory last July, when a US district court judge ruled that its crypto token XRP was not a security, when marketed and sold to retail investors. Judge Analisa Torres noted, however, that XRP amounted to a security when sold to institutional investors, further increasing uncertainty over the SEC’s jurisdiction as it attempts to consolidate absolute authority over the sector.
Both cases are ongoing, and the split decision in the Ripple case leaves the door open to further questions regarding the alleged dual nature of cryptocurrencies.
Bini’s suggestion that the New York Court of Appeals for the Second Circuit is the one to watch has already proven accurate in the past. Last December, Judge Jed Rakoff ruled that Terraform, a blockchain network and payment system, had sold unregistered securities in the form of stable coins Luna and US Terra, after the SEC accused its founder, Do Kwon, of with multiple cases of fraud.
“The SEC’s role is not to exercise vast economic power over securities markets, but simply to ensure that they provide adequate disclosure to investors,” Judge Rakoff said he wrote according to him last July.
This could be enough to change the dynamic of cryptocurrency regulation, provided enough judges side with Rakoff’s interpretation. In this case, Bini says, “I think almost any cryptocurrency would be considered a security.”
Even as the regulatory issue drags on in court, there’s reason to believe a roadmap is slowly forming, despite SEC Chairman Gary Gensler’s tough talk on the topic. “Gensler has said in the past that the use case for all cryptocurrencies is to funnel money to criminals,” Hadas Jacobi, a consultant at Reed Smith, tells Inc.. But in January, the SEC granted the industry an air of financial legitimacy by approving the first Bitcoin exchange-traded fund.
The new model, Jacobi says, allows the SEC to more consistently do its job regarding cryptocurrencies: that is, enable transparency. “It’s the SEC’s job to protect investors so they know what they’re investing in,” Jacobi adds.