Ripple puts SEC on losing end in crypto regulation proposal

In a March court filing, Ripple accused the Securities and Exchange Commission (SEC) of “picking virtual currency winners and losers.” The jab came in response to a lawsuit the regulator brought against the beleaguered blockchain payments company in December 2020, claiming that XRP — the digital asset Ripple’s founders developed — was an unlicensed security.

Before the suit, XRP was the world’s third-largest cryptocurrency — behind Bitcoin and Ethereum. However, XRP lost 60% of its value in the week after the SEC suit as exchanges including Coinbase delisted it. Meanwhile, Bitcoin and Ethereum, Ripple argued in its March filing, remained exempt from similar SEC regulation.

In proposing its approach to crypto regulation Tuesday, Ripple — consciously or not — may have laid out a landscape that leaves the SEC at the losing end, in favor of other regulators.

Central to the philosophy Ripple espoused Tuesday is the idea that the current regulatory framework can be used to police the crypto space.

“We believe that framework, as adapted to account for some of the unique attributes inherent to cryptocurrencies, can provide the clarity innovators seek — and the market protections consumers deserve,” Ripple wrote Tuesday on its website. 

That runs counter to an assertion Coinbase made last month in its own policy document, arguing the framework as it exists leaves too many regulators trying to stretch their missions to incorporate crypto. Coinbase instead favors creating a new regulator devoted specifically to digital assets.

“Laws drafted in the 1930s to facilitate effective oversight of our financial system could not contemplate this technological revolution,” Coinbase wrote last month. “Forcing the full spectrum of digital assets into supervisory categories codified before the use of computers risks stifling the development of this transformational technology.”

Ripple, on the other hand, touted legislation such as the Digital Commodity Exchange Act, which aims to define “digital commodity exchanges” and puts them under the purview of the Commodity Futures Trading Commission (CFTC).

The company also cited the merits of the Securities Clarity Act, which proposes crypto products be considered “investment contract assets” — thus delineating them from securities. Such a move may help eliminate the SEC’s argument that certain crypto-related products — interest-bearing accounts, for example — are securities. 

The measures Ripple proposes in its vision “aim to provide legal clarity to industry, markets, and consumers in a way that a regulation-by-enforcement approach simply cannot,” the company’s CEO, Brad Garlinghouse, said in a statement.

That in itself may be a not-so-subtle dig at the SEC. And Ripple is not the only crypto firm to accuse the regulator of that pattern. 

“Regulation by litigation should be the last resort for the SEC, not the first,” Coinbase CEO Brad Armstrong wrote in a September tweet, a day after the crypto exchange revealed the SEC threatened to sue if the company launched its interest-bearing product, Lend. Coinbase scrapped the product two weeks later. 

The pursuit of regulatory clarity — and the assertion that the SEC isn’t giving it — may be among the only commonalities in Coinbase’s and Ripple’s philosophies. Of course, they are not the only two companies to find themselves on the business end of potential legal action from regulators.

The SEC is reviewing BlockFi’s interest-bearing products, Bloomberg reported Wednesday, although the regulator has not accused the company of any wrongdoing. The probe comes more than three months after securities regulators in New Jersey, Texas and other states ordered BlockFi to stop offering the accounts to residents because the products aren’t registered as securities. BlockFi, on its website, says it is having “ongoing discussions with regulators.”

Armstrong in September accused the SEC of a “land grab vs other regulators,” arguing it was attempting to fill the void in what was otherwise a regulatory gray area, all the while “refusing to offer any opinion in writing to the industry on what should be allowed and why, and instead … engaging in intimidation tactics behind closed doors.”

Ripple’s vision incorporates other prongs, suggesting regulators encourage an innovation sandbox — a la yet another regulator, the Consumer Financial Protection Bureau (CFPB). (SEC Commissioner Hester Peirce has also proposed a safe harbor regime under which developers can launch products and build their networks for a limited time without needing to comply with federal securities laws, under certain conditions.)

Ripple also touted the value of public-private collaboration — akin to a framework proposed under the Eliminate Barriers to Innovation Act. And here, Ripple doesn’t cut the SEC out entirely. The bill requires the establishment of a collaborative working group consisting of appointees from the SEC, CFTC and representatives from fintechs, financial firms and small businesses.

“Developing an effective policy framework for cryptocurrencies will only be possible if there is clear communication and collaboration between private and public actors,” Ripple’s head of public policy, Susan Friedman, said Tuesday. “These conversations have helped shape our perspective on the type of regulatory clarity the industry and broader ecosystem need from regulators, as well as the type of requirements regulators should demand from the industry.”