Following the collapse of FTX, the second largest digital asset exchange in the world, U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler repeated sensless talking points about crypto regulation, insisting that SEC rules are “very clear” on crypto and that FTX, like Terra Luna and Celsius before it, failed because they were “not registered”. Even as hundreds of billions of dollars in investor holdings vaporize, and the evidence of staggering fraud at FTX was quickly apparent, Gensler still believes that investor protection in crypto begins and ends with a still-yet-undefined (and maybe impossible) process of registering cryptocurrencies.
Few, if any understand what Gensler is talking about. There is no guide on how a line of code that is used on a decentralized blockchain ledger can be registered as a security, or under what circumstances, or who files the forms, how frequently, or what information needs to be included, or what it is supposed to accomplish. Moreover, instead of publishing those rules that Gensler repeatedly insists are “very clear”, his SEC opts to selectively sue companies and individuals. It has been an expensive, grindingly slow, and messy failure, while the FTXs of the world destroy retail investor wealth – and faith in the crypto marketplace – at an enormous scale and speed.
CNBC’s Aaron Ross Sorkin challenged Gensler over his intense focus on relatively inconsequential crypto players like Kim Kardashian while such bigger investor harm was from non-celebrities. But his misguided focus is better illustrated in the SEC’s lawsuit against the San Francisco-based enterprise blockchain company Ripple. He inherited this legal boondoggle from his predecessor, Jay Clayton, but in the wake of the crypto winter of 2022, the Ripple case embodies Gensler’s failed approach to crypto regulation that has harmed many and protected none.
The SEC alleged in its December 2020 lawsuit that Ripple’s sales of XRP since 2013 have been unregistered securities transactions, and that the company and its executives acted with reckless disregard for the law by not knowing this all along. Had Ripple somehow registered the XRP token as a security in 2013 – a process that has, in fact, never existed – then the holders and users of XRP would have been “protected”. From what, no one seems to know, since Ripple has not been accused of any wrongdoing towards them.
The pointlessness of the lawsuit became increasingly clear after Ripple decided to fight rather than fold. The SEC based most of its legal theory on the argument that XRP has no utility other than as an investment in Ripple, the company, and the token itself is a security even when sold on the secondary markets.
However, evidence was submitted in court that most XRP holders had no knowledge or connection to the company and the token’s market price is not connected to Ripple’s actions. How then could XRP even be an investment in Ripple?
Surprisingly – and organically – the SEC’s overly-aggressive posture provoked a reaction in the form of an unprecedented number of amicus curiae briefs against the SEC, including from a putative class of over 75,000 XRP holders and several companies that acquire and use XRP as a settlement tool for payments without the permission or involvement of Ripple. If anything, XRP’s utility beyond Ripple has been well-established. Even Magistrate Judge Sarah Netburn seemed to understand that early in the proceedings.
Ripple’s court-documented actions with regard to XRP, when compared to the revelations about the con artistry of FTX founder Sam Bankman-Fried, should be a wake up call for Gensler’s defenders. Ripple detailed in its defense that it has distributed its XRP holdings in many ways like programmatic sales to exchanges, and in January 2017 they began publishing quarterly reports detailing their XRP sales with additional market information. At the same time, court documents show repeated efforts by Ripple and other market participants to get clear guidance from the SEC for years about whether XRP was a security, which was only answered by the lawsuit. The company was more transparent than it arguably had to be with no help from the SEC. The mere filing of the lawsuit in 2020 wiped out $15 billion in value for the XRP holders that the agency is supposedly protecting.
Meanwhile, Bankman-Fried was reportedly raiding customer deposits from the FTX exchange to prop up his Ponzi hedge fund, while advancing federal legislation to benefit his company thanks to tens of millions of dollars in political donations. Why, again, is the SEC waging a costly war against Ripple while all that was happening right under its nose? One company went over and above what it rationally perceived as its legal duty, while the other was the model of what must never be done.
Ripple CEO Brad Garlinghouse tweeted that his company will spending over $100 million on its legal defense. If it wins, the verdict could bring a sweeping precedent that severely limits the nearly 80 year-old legal precedent upon which Gensler bases his whole regulatory policy on crypto. But it’s not necessary to wait that long for Congress and the Biden Administration to take a comparative look at the lessons of the Ripple case against the lessons of the FTX disaster, and start mapping out what transparency, investor protection and “clear rules” actually mean once and for all. In the end, they will likely conclude that instead of suing Ripple, Gensler should have been thanking them.