SEC Fees Pressure to Define Crypto Assets

The judge clarifies the content of some emails and internal communications regarding the classification of digital assets Ethereum and XRP for the next Ripple Labs trial submitted by the Securities and Exchange Commission (SEC) on April 11. I have dismissed the allegations. This may seem like a small defeat to regulators, but it can affect not only this case, but the entire crypto community as well.

The SEC has encouraged token issuers to use their executive authority almost exclusively to register digital assets as securities. However, the number of legal disputes is increasing because there are no specific rules that determine which digital assets (cryptocurrencies, tokens, stablecoins, etc.) are considered securities. Many of these cases are overlooked as the parties have arrived at a friendly solution, but the Ripple Labs case can have long-term consequences.

The SEC uses a “Howey” test to define what an investment contract is and defends that most digital assets are securities and therefore under their supervision. In the Howie test, adopted by the United States Supreme Court in 1946, an investment contract exists if there is an “investment in a general enterprise that can reasonably expect the benefits of the efforts of others.”

Therefore, if digital assets, whether cryptocurrencies or tokens, are used as investment contracts, they may be eligible for securities and the SEC will disclose and register under the Securities Act of 1933 and the Securities Exchange Act of 1934. You can request requirements. Digital coins like XRP are securities, not payment methods, and the fact that companies had to register their assets is what the SEC defends in its enforcement measures, especially in proceedings against Ripple. However, these requirements do not apply when digital assets are used as currency or commodities. Ripple claims that XRP is exempt from these federal laws.

At the heart of this proceeding are questions that have not yet been answered by the SEC or other institutions, whether cryptocurrencies are securities, commodities, or whether they are for regulatory purposes.

Since the proceedings did not have a clear position when the proceedings began on what defines digital assets as security, the proceedings stated what the SEC’s director of corporate finance, William Hinman, was. It is based on. It’s not security. For example, Ripple’s allegation is that Hinman announced in 2018 that ether, the second most valuable cryptocurrency, is a token rather than security, and that the market will avoid classifying this speech as digital coins as security. He said he understood.

The proceedings have an additional layer of conflict of interest, which, if proven, will benefit Ripple in the case. According to Ripple, Hinman was interested in promoting Ethereum, given his previous (and later) involvement in a law firm advising the Enterprise Ethereum Alliance. His speech that he declares ether as a token rather than security and does not do the same for similar digital assets can be seen as evidence of this conflict. The SEC argued that Hinman’s speech reflected his personal view, not the SEC’s view.

However, district judge Analisa Torres was dissatisfied with the argument and said: [the SEC Division of Corporation Finance’s] The approach of regulating the provision of digital assets is inconsistent with SEC and Hinman’s previous position that the speech was intended and reflected his personal view. “

Currently, the SEC needs to release a draft version of all emails and 2018 speeches within the next few weeks.

The outcome of this case is still unknown and may not provide a definitive solution for classifying cryptocurrencies as tokens, currencies, or securities, but more through rulemaking than personal enforcement. Cases that are putting pressure on the SEC to provide clear guidance.

reference: SEC Chair emphasizes investor protection in cryptographic regulation