Ripple Case Headlines Latest Developments in Crypto Regulation

An impending court decision in the Securities and Exchange Commission’s lawsuit against San Francisco-based crypto solutions company, Ripple, stands to make a big splash in the cryptocurrency sector.

The SEC filed its legal action against Ripple in December 2020, charging that the company acquired more than $1.3 billion via an unregistered securities offering of its digital XRP cryptocurrency. Ripple markets XRP, which runs on the company’s blockchain payments system, as “the most practical cryptocurrency for applications across the financial services space.”

In what has become the defining question of crypto regulation, the case hinges on determining if XRP qualifies as a security or currency. In other words, are digital tokens like XRP instruments for holding value, or are they investments that offer owners the possibility of appreciation?

If they fall under the latter, crypto assets would be subject to the same disclosure requirements imposed by the SEC on securities offerings from publicly traded companies. When the SEC filed its complaint in 2020, former director of its Division of Enforcement, Stephanie Avakian, alleged Ripple and its executives had “deprived potential purchasers of adequate disclosures about XRP and Ripple’s business and other important long-standing protections that are fundamental to our robust public market system.”

Classification issues aside, crypto players seem miffed that the commission is taking what they view as an approach of “regulation by enforcement” to get a handle on the sector. As such, they’re looking at the case as a path to force the SEC to the table to hash out the parameters of a regulatory regime for digital assets.

The Ripple case isn’t the only potential flashpoint in the crypto world, however. The SEC is also moving to change the so-called custody rule, which dictates how registered investment advisers safeguard their clients’ assets. Those would include everything from real estate holdings to digital tokens. (The proposal mentions crypto explicitly.)

To be fair, the custody rule was last updated in 2009 and needs a refresh to reflect advancements in technology and evolving security threats. But in a note to clients about the proposal, lawyers at Sidley Austin LLP warned that the proposal as written would have “broad-reaching and potentially costly effects – particularly for smaller investment advisers.”

Lastly, the SEC announced a settlement in February with implications for what is known as crypto staking. Staking refers to the practice of transferring crypto assets to a company to help maintain a blockchain network. The commission reached an agreement with San Francisco-based Kraken after charging the crypto exchange with participating in an unregistered securities offering through its program of “staking as a service.”

Essentially, investors were transferring their digital tokens to Kraken in exchange for advertised annual returns as high as 21%. If that sounds to you like the equivalent of crypto lending, which was squelched in 2022, the SEC concurred. Kraken agreed to pay a penalty of $30 million and end its staking program.