Landmark. One of the biggest stories in the cryptocurrency market towards the end of last year was the lawsuit that the SEC filed against Ripple Labs and its two executives.
The case, filed on December 2, alleged that both officials offered and sold over $1.38 billion of digital asset XRP without registration or exemption in violation of Section 5 of the Securities Act of 1933, seeking disgorgement of ill-gotten gains.
Ripple replied (PDF file) back with an answer on January 29, denying that XRP is a security or that it violates the securities law. Ripple differs from Bitcoin or Ether in that the latter two cryptocurrencies are acknowledged by the SEC to be non-securities in that they are minted via a mining process.
Damage, though, had already been done, with companies now hesitant to use Ripple, and exchanges delisting the coin following the SEC complaint.
At the heart of this case is the issue that has been central to just about every other enforcement action brought by the Securities and Exchange Commission. That being, whether XRP is an investment contract, and thus a security.
This is precisely the regulatory Catch-22 that crypto network developers have faced.
Distributing tokens to people may violate the securities laws if the network isn’t functional or decentralized. But the way things work in the crypto domain, a network can’t mature into a functional and decentralized system unless the tokens are distributed and are freely transferable.
Among potential users and developers on the network, that is.
Whether or not cryptocurrencies are investment contracts, and thus securities, remains an unresolved issue that vexes crypto network entrepreneurs.
We are in a regulatory vacuum in which the SEC has not provided enough formal guidelines to cryptocurrency developers and their lawyers. Recommendations on how to launch digital currencies without triggering the securities law.
But that could soon change.
The decision in the Ripple case is sure to not just provide some much-needed clarity, but will make waves throughout the digital assets market, no matter the final decision.
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