Grayscale, Ripple lawsuits show crypto’s litigious side

If in doubt, take off your pants

When the SEC shot down the grayscale pitch of Bitcoin Spot ETFs, crypto investment companies could have given it another attempt by submitting a new proposal. However, the company signaled that Grayscale was obsessed with going to court. And that’s not the only positive legal stance towards regulatory agencies.

Proceedings have emerged as an important tool in cryptography. The grayscale dispute shows how important courts have become in resolving issues with regulatory agencies like the SEC.

• Grayscale CEO Michael Sonnenshain was talking about his company’s plans to become a lawyer a few weeks before the SEC’s decision. The company hired prominent Washington lawyer Donald Beriri to prepare for a court battle.
• There is a long history of courts shaping how to interpret financial rules. The Howie test, still used by the SEC to determine if an asset is a securities, is based on the 1946 Supreme Court ruling on orange groves.
• Victory is never guaranteed, but courts can provide an exit for well-funded crypto companies to flex their resources. “If you have enough money to file or defend a lawsuit, you can more easily undermine your opponents, even if they are the main regulators,” said FinTech, Americans for Financial Reform. Mark Hays, Senior Policy Analyst, said. He advocates stronger consumer protection in cryptographic regulations.

The crypto industry is aiming for a new legal opening. The Supreme Court’s decision to limit the EPA’s ability to draft climate change-related regulations can have widespread implications for all federal agencies.

• Perriand Bowling, founder and CEO of the Digital Commerce Chamber of Commerce, a major crypto lobby group, said in a tweet on the day the decision was announced, “The digital asset industry is navigating. We will challenge regulation with an enforcement approach that has been forced to gate. ” ..
• It is not clear how the EPA’s decision will affect the crypto case. Todd Phillips, director of financial regulation and corporate governance at the Center for American Progress, noted that the Supreme Court’s decision focuses on authorities that must address key questions that are not directly assigned by Congress. The SEC has long regulated securities and many crypto assets are in the position of securities. “Therefore, we are not trying to address a problem that the SEC has never addressed before,” he said.

Another carefully watched legal brawl is the SEC proceedings against Ripple. In that case, regulators accused the crypto company of not registering $ 1.4 billion of XRP as a security. The proceedings filed in 2020 damaged Ripple and dramatically reduced the value of XRP.

• However, court struggles are now seen as a potential turning point in cryptography. If Ripple wins, it could undermine the SEC’s claim that most cryptocurrencies should be registered as securities. “It could open the door to other tokens that are considered non-security,” said Mark Farhel, a former regional director of the SEC. “It may reduce the jurisdiction of the SEC.”
• However, proceedings can also be risky for crypto companies. Cathy Yoon, MPCH’s Chief Legal Officer, cited the cost of taking legal action in the event of a prolonged proceeding. “In the end, even if you win, you may not be able to continue your business,” she said.

Catherine Dowling, Chief Compliance Officer and Legal Advisor at Bitwise, said the proceedings could be a “way” for crypto companies, but they are not always the most efficient. Court decisions are usually based on the facts of a particular case and may limit its application. Laws and clearer regulations drafted in consultation with the industry are still the preferred path, she said.

— Benjamin Pimentel (Email | twitter) When Ryan Defenbo (Email | twitter).

A version of this story first appeared on Protocol.com. Read it here.