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Joe Biden's nominee for Chairperson of the Securities Exchange Commission has finally been confirmed (or whatever the correct term is for a trial by Congressional fire these days), so I'm told.
An American friend of mine mentioned that the chap had once been something in commodities... a coffee trader, perhaps(?)* Well, I'll say one thing: he's gonna need to know where to find a good cup of joe if he wants to make it through the next few years.
For those who don't have their news aggregator permanently set to "securities commission", the context for this investiture includes the SEC having embroiled itself in a lawsuit against Ripple over the unregistered sale of XRP tokens worth over US$1.38 billion. Under the Securities Act of 1933, all offers and sales of securities must be either registered with the SEC or conducted in compliance with an exemption from registration.
The SEC vs. Ripple lawsuit has been in motion since December last year when the SEC charged that the sale of XRP tokens was an unregistered securities offering. Ripple is defending itself--and co-defendant executives Chris Larsen and Brad Garlinghouse--vigorously both in the court proceedings and in the media. CEO Garlinghouse has been vocal about how he sees the lawsuit as an attack on the industry as a whole, not just one company or cryptocurrency. In any event, the action doesn't seem to have deterred any prospective customers: XRP sales rose to $150 million in Q1 2021 compared to $76 million in Q4 2020, an increase of 97%.
Ripple 's defence alleges "lack of due process and fair notice” in the manner in which the SEC brought the charge. The tech company's legal team has also submitted a memorandum of law which argues that XRP does not satisfy the Howey Test for securities-as-an-investment-contract and that the co-defendants need not have apprehended any (re)characterisation risk.
At a minimum, to plead recklessness, the SEC must allege that it was “so obvious” to Mr. Larsen that he “must have been aware” both that XRP was an “investment contract” and that Ripple’s conduct was improper.
[...]
Ultimately, all the SEC has alleged is that Mr. Larsen took a position on a novel and unsettled legal issue different from the one the SEC ultimately adopted in December 2020 when it filed this case. Such allegations are insufficient to state a claim that Mr. Larsen acted knowingly or recklessly.
It looks very much as if Ripple is hoping that the Court will view "crypto" as a single, universal "thing"; infer from the fact that Bitcoin can be "money" that XRP can also be money; glide through to the premise that XRP is "money" by definition; and arrive at the conclusion that virtual "money" is precluded from being virtual "securities".
'Nuff said. Someone--maybe it was my American friend--once told me that Judice doesn't like it when a case is "Sub" and people like me run their mouth.
Fortunately, I don't have to run my mouth about recharacterisation risk when it comes to cryptocurrencies, though, because I've said, presented, written and authored quite a bit on the subject in the past. And the general tenor of my remarks has always been that the common law of property doesn't necessarily recognise the kind of bright-line, mutually exclusive legal categories (money, commodities, securities...) that are implied in the segmented jurisdictions of the the US regulatory landscape.
So virtual currencies may be money for the purposes of exchange. But they may also be other things from the regulatory perspective: they may be securities or commodities for example. This slide contains a number of references to the perspective of the CFTC, which has concluded that virtual currencies may be commodities for the purposes of the Commodities Exchange Act. In July, the US Securities and Exchange Commission announced that coin offerings and sales of digital assets are subject to the requirements of the federal securities laws. The announcement made it clear that the question whether a particular investment transaction involves the offer or sale of a security will depend on the facts and circumstances, including the economic realities of the transaction. What I would like to stress today is that none of these developments preclude the possibility that virtual tokens may have the legal aspect of money while having some of the regulatory aspects of securities or commodities. The question is, as the SEC suggests, a fact-dependent and complex one. ("Legal Aspects of Virtual Currencies", Goodacre Securities Industry Conference, 6 October 2017 per Joanna Perkins)
So, in my view, the SEC is not dead in the water quite yet but with XRP holders reportedly "itching for battle", the regulator has its work cut out. And, XRP is far from being the only ripple on the surface of the SEC's infinity pool. There's a concern about undue concentration in the world of securities market-making, for one thing, and the rise and rise of unregulated crypto exchanges, for another. Then there's exuberant day-traders with a wanton disregard for their own protection, the meltdown of a major investment fund and a whole stack of SPACs that appeared out of nowhere earlier this year.
Not to mention, there's a pile of Chinese equities being tossed on stormy geopolitical seas which may be coming or going, no one quite seems to know. Phew! You'd need a strong nerve to take it all on, without cracking like an egg.
Which brings us back to the new SEC Chair. When Michael Jackson told Paul McCartney "I'm a lover not a fighter," he spawned one of the great iconic ironies of 20th century pop culture. The Biden Administration must hope that Mr Gensler has an entirely different song to sing.
* Having worked in financial regulation for 17 years, it's just possible that I am being deliberately disingenuous here.
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