Black and white hypnotic spiral
Over the past two U.S. administrations, the U.S. Securities and Exchange Commission (SEC) has promoted a comprehensive “regulation by enforcement” policy for U.S.-based digital asset marketplaces like Coinbase and the enterprise blockchain industry that develops fintech solutions like Ethereum, Ripple, Stellar, and Circle. Two successive presidents – Jay Clayton and Gary Gensler – have said that every digital asset except bitcoin is a security and should be registered with the SEC like a stock. The details end there, unless you find yourself on the wrong side of an SEC lawsuit. The SEC is betting on quick settlement of the parties it invoices. Parties who dare to challenge the SEC need financial reserves, superstar attorneys, and years of patience to get litigation through the courts. This “enforcement” produces little clarity for the market or protection for investors, which is the ostensible point of the regulatory exercise.
FTX
The SEC claimed that this approach would “protect investors.” It didn’t work for FTX. A series of regulatory mishaps and wealth-destroying events have created the current “crypto winter”.
SEC Chairman Gary Gensler claims that FTX – all other digital crypto assets are – “non-compliant” and their innovators must “enter and register” with the SEC. Presumably, the paper and physical presence at the SEC is just the ticket. In any event, the SEC has not issued any such registration forms, guidelines, procedures or instructions, or any theory as to how such regulatory deterrence will protect investors.
Sheila Warren, the highly respected head of the Crypto Council for Innovation, observed correctly that the FTX affair is not about the crypto itself but about the criminals. Sam Bankman-Fried and his conspirators are duly charged with multiple charges of fraud, wire fraud, theft and money laundering by the Justice Department, in addition to the SEC complaint and another for violation campaign finance. This shoes that already “crypto is subject to a variety of regulations and laws,” Warren notes. In fact, there are already several regulators claiming jurisdiction over crypto.
Gensler’s industry-wide scapegoat is likely a distraction from the many meetings he and his entourage have had with FTX founder Sam Bankman-Fried (SBF) and how close SBF has come to a let -pass regulatory before the fraud appears under the nose of the SEC.
Ripple
But FTX wasn’t the only big event in crypto at the end of the year that kicked off the SEC’s spin machine. The cryptocurrency trial of the century – DRY. v. Ripple – reached final arguments after two grueling years in the Southern District of New York. The lawsuit regarding sales and distributions of the XRP token by the San Francisco-based enterprise blockchain company is the SEC’s landmark case for crypto-enforcement policy regulation.
It was apparent when Clayton’s SEC filed the case on the last day of his tenure that it was a bet for a quick settlement. The SEC made sweeping arguments that the XRP token itself was a security for seven years, and included Ripple Chairman Chris Larsen and CEO Brad Garlinghouse as defendants. In retrospect, it seemed tactical to terrorize the company’s two senior officials into a settlement, isolate the company in court, and shame it into surrendering. But Ripple fought back, tore up legal theories from the SEC, and won strong support from 75,000 XRP holders and many leading industry associations, legal experts, and companies.
It was therefore curious that Charles Gasparino of Fox Business tweeted exclusive reports on an “autopsy” of the Ripple affair taking place at the SEC. Gasparino and his colleague Eleanor Terrett reported about conflicts of interest between Clayton and his now deceased senior executives.
Gasparino tweeted“it’s worth asking why the SEC focused on XRP/Ripple,” noting that his agency’s sources claim that “Ripple’s management was flouting its authority by continuing to sell XRP after being warned to stop because the way it was being sold seemed to establish XRP’s designation as a security.
Ripple has never received a “stop notice” of selling XRP from the SEC. No official letter or warning was published or issued and did not appear on the holster pocket. While Ripple sales “appeared” to make XRP a security for a manager, a wealth of emails and internal documents that the SEC fought for more than a year to hide from the judge, showing a muddy internal picture. What does “compliance” mean to Ripple or any market player in such a cloud of confusion?
Journalist Gasparino tries to capture verbatim the SEC’s mind-blowing gibberish on the matter, but no conversational workaround can hide the SEC’s failed and destructive policy of regulation by enforcement.
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