By Roslyn Layton. August 28, 2022. (Forbes)
By law, regulatory agencies should only regulate that which they have authority to regulate. Deference is allowed to some degree, should the agency’s justification be reasonable and ideally evidenced. Notably Congress promulgated the Administrative Procedure Act (APA) in 1946 to guide agency process to publish notice of rulemaking in the Federal Register and provide opportunity for public comment. This standard process seems to have never have happened for crypto assets at the Security and Exchange Commission (SEC). The SEC website does not include an entry for regulation for crypto, either completed or proposed.
In May 2022, the SEC beefed up its Cyber Unit to the Crypto Assets and Cyber Unit, budgeted for 50 dedicated officers and more than doubling the department’s headcount. The unit counts some 200 lawsuits since its founding in 2017, with fraud being the subject in at least 80 investigations. The agency also reports restoration of $2 billion in monetary relief.
No one denies that crypto assets, like any asset or technology, can be used fraudulently. The very features that make crypto assets desirable can also be exploited, including but not limited to ease of startup and use, anonymization, and lack of intermediaries. Plus, some users can undoubtedly be greedy and gullible. It does not help that some have disguised crypto scams as legitimate services.
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Following 16 months of intense pre-trial litigation, countless hours in court and over 600,000 documents reviewed by both sides, the case that’s being billed as “the cryptocurrency trial of the century” could all come down to one speech made by a former Securities and Exchange Commission official four years ago.
That case, of course, is the lawsuit brought in late 2020 by the SEC against payment settlement company, Ripple. The SEC says Ripple violated securities laws when it failed to register with the agency sales of its native cryptocurrency token, XRP, that helped finance its platform and facilitate payments on Ripple’s network.
At the heart of the commission’s case is a contention that XRP was being sold by Ripple and its top executives as an illegal and unregistered security. The commission is seeking billions of dollars in damages.
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By Chris Dolmetsch. July 15, 2021. (Bloomberg)
Ripple Labs Inc. can question a former Securities and Exchange Commission official about the agency’s policy decisions as the company fights a lawsuit accusing it of misleading investors about its XRP cryptocurrency, a federal judge ruled.
The SEC sued Ripple, co-founder Christian Larsen and Chief Executive Officer Bradley Garlinghouse in New York last year, saying they had created a “vacuum” that allowed them to sell XRP into a market with limited information they chose to share. The agency alleges that the two men personally profited by about $600 million and ignored legal advice that the cryptocurrency could be considered an investment contract and therefore a security. It accused them of selling the virtual tokens without registering them as such.
Ripple has said the SEC can’t regulate XRP because, as a virtual currency used in international and domestic transactions, it’s a medium of exchange and not a security.
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Check out The Federalist Society’s Regulatory Transparency Project’s Deep Dive podcast featuring John Berlau, John Deaton, Carol Goforth, and Roslyn Layton on YouTube. The four, hosted by Curt Levey, discuss the ongoing lawsuit and its potential impacts.