Regulatory Storm: Dilemma and Opportunities in the Crypto Industry
Author: Phoenix Capital Management
Translator: BlockEden.xyz Team and Payton Chat
📌 A deep dive into the regulatory disputes and legal issues the crypto industry faces in the past, now, and predictably in the future.
TL;DR
- In the Ripple case, a partial victory was achieved in the programmatic sales, avoiding being recognized as securities sales. We have carefully analyzed the court's ruling logic and believe that there may be quite obvious errors in fact recognition, which has a high possibility of being overturned later.
- We've examined the historical origins and basic connotations of securities law, and believe that tokens narrated as "the project team is doing their job" are close to the securities law definition. Thus, a reasonably high proportion of tokens may be recognized as securities in the future. However, the current SEC's regulatory demands further exceed the reasonable scope of securities law.
- Staking/yield farming is more likely to be considered securities than token sales.
- Compared to the regulation of CeFi, the regulation of DeFi is at an earlier stage. In addition to securities law, more uncontroversial regulatory issues like KYC/AML are yet to be resolved.
- Even if a large number of altcoins are identified as securities, it would not signify the end of the industry. High market cap tokens are fully capable of seeking compliance in the form of securities; lower market cap tokens may exist in non-compliant markets for a long time but can still indirectly gain liquidity from compliant markets. As long as there is a clear regulatory framework, regardless of its nature, the industry can find new paths and models for long-term development.
Table of Contents
- Long-Awaited (Temporary) Victory - An Interpretation of the Ripple Case
- Howey Test, Orange Groves, and Cryptocurrency
- Why Securities Law Exists
- Project team is doing their job = Securities?
- Recap of SEC vs Ripple Labs
- A token is just a token. A token is NEVER a security
- Looking forward - Where are the risks and opportunities?
- Securities law is not the only concern
- What if crypto loses? - Securities law won't kill altcoins
- Peace is More Important Than Victory
Long-Awaited (Temporary) Victory - An Interpretation of the Ripple Case
On July 13, 2023, Ripple Labs received a partial favorable ruling from the New York District Court, causing a significant surge in the crypto market. In addition to XRP itself, a series of tokens previously identified as securities by the SEC also experienced a substantial increase.
As we will discuss later, we are still far from the era when the crypto industry truly embraces clear regulation. However, without a doubt, this partial victory of Ripple Labs remains one of the most important events in the crypto industry in 2023.
Below are some of the major disputes between U.S. regulators and the crypto industry before the SEC vs. Ripple Labs case.
Case | Date Settled | How it's Settled |
---|---|---|
SEC vs Block.one (EOS) | 2019/09 | Block.one Settles with SEC, Pays $24mn Fine |
SEC vs Telegram | 2020/06 | Court Rules Telegram's Actions as Selling Unregistered Securities, Telegram Returns 18.5mn Fine |
CFTC vs BitMEX | 2021/08 | Court Determines BitMEX Engaged in Illegal Derivative Trading (specific projects are too numerous to elaborate), BitMEX Pays $100mn Fine and Ceases Illegal Activities |
SEC vs BlockFi | 2022/02 | BlockFi Settles with SEC, Seeks Business Compliance, and Pays $100mn Fine |
SEC vs Nexo | 2023/01 | Nexo Settles with SEC, Shuts Down Lending Business, and Pays $45mn Fine |
SEC vs Kraken | 2023/02 | Kraken Settles with SEC, Shuts Down Staking Business, and Pays $30mn Fine |
CFTC vs Ooki DAO | 2023/06 | Court Determines Ooki DAO as an Illegal Futures Trading Platform, Orders to Shut Down All Business, and Pays a $644k Fine |
It's not hard to see that nearly all the major disputes so far have ended in failure or compromise by crypto companies.
We still want to say, this represents the first meaningful victory for the crypto industry in its battles against U.S. regulators, even if it is only a partial victory.
There have been many detailed interpretations of the court's judgment, so we won't elaborate here. Those who are interested can read the long Twitter thread by Justin Slaughter, Paradigm Policy Director:
Ok, having gone through the Ripple decision, here’s my takeaway:
Big loss for the SEC’s approach to crypto via focusing solely on enforcement, and this measurably increases the odds of crypto legislation passing this year.
Thread https://t.co/c4wOVPORVb
— Justin Slaughter (@JBSDC)
July 13, 2023
You can also read the original text of the court's ruling in your leisure time:
Plaintiff vs. Ripple Labs, Inc.
Before further interpreting this ruling, let's briefly introduce the core standard for the definition of securities in the U.S. legal system that you often hear about, the Howey Test.
Howey Test, Orange Groves, and Cryptocurrency
To understand the disputes surrounding all cryptocurrency regulations today, we must go back to sunny Florida in 1946, to the cornerstone case for today's securities law judgment, SEC vs. Howey.
(The following story outline was mainly written with the help of GPT-4)