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Emboldened Crypto Industry Prepares Legal Assault on SEC

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Emboldened Crypto Industry Prepares Legal Assault on SEC

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“As a lawyer, you’re kind of trained and taught not to fight with regulators,” Ripple’s general counsel Stuart Alderoty said in an interview. “But we didn’t seek a fight with a regulator, the regulator chose a fight with us. Respect for regulators has to be earned, and I don’t think the SEC has earned the right to earn respect from industry.

The impending legal roadblock is just the latest example of the cryptocurrency industry taking an aggressive stance with Washington policymakers threatening industry growth. This year is poised to be a key inflection point in policy and regulation regarding digital assets, with several federal agencies making the issue a top priority and lawmakers drafting a series of laws. Crypto firms are stepping up their lobbying and plan to distribute millions of dollars in financial contributions in a bid to secure allies in government and undermine opponents.

“There’s a carrot and stick approach,” said Kristin Smith, who leads the Washington-based Blockchain Association, a trade group. “It’s aggressive – more aggressive than maybe other industries.”

Gensler — a former Goldman Sachs partner who has become a progressive darling due to his tough approach to Wall Street regulation — took a broad view of the SEC’s role in cryptocurrency, arguing that most products fall under within the competence of his agency. A series of enforcement actions and behind-the-scenes clashes with startups have put him at odds with the crypto community.

SEC spokespersons declined to comment for this story.

“Right now, we just don’t have enough investor protection in crypto,” he said in an August speech that set the tone for his approach. “Frankly, at that time, it’s more like the Wild West. … If we don’t address these issues, I’m afraid a lot of people will be hurt.

The SEC’s legal war with crypto began in the final days of the Trump administration just before Gensler took over as head of the agency.

In December 2020, the agency sued Ripple, accusing the company of illegally raising more than $1.3 billion through the sale of the digital currency XRP. The SEC argues that XRP is a security that should be registered with the agency under the “Howey Test,” a landmark Supreme Court ruling that provides the legal basis for defining investment contracts.

Unlike other SEC enforcement actions that are resolved by settlement, Ripple has retaliated and the case is pending in federal court. The company argues that XRP is not an investment contract and that the SEC never provided “fair notice” that XRP was an unregistered security – a violation of due process.

Ripple has started getting procedural wins. A judge handling the case this month ordered the SEC to turn over internal documents that may offer new details about how agency officials developed their views on digital assets.

The SEC allegations are “not just a matter against Ripple, but a matter against the entire industry,” said Alderoty, general counsel for Ripple.

JW Verret, associate professor at George Mason University’s Antonin Scalia School of Law, said an SEC loss on the “Howey test” would mean the regulatory threat to a number of cryptocurrencies” disappears”.

“The Ripple litigation could bring quite a lot of changes if Ripple is victorious,” he said.

Jeff Hauser, financial industry critic and founder of watchdog group Revolving Door Project, said Ripple’s assertion is tantamount to claiming that new cars may not be subject to existing speed limits.

“If you have the first 2023 Tesla and you’re driving down the freeway and you’re going 90 miles an hour, and you tell a police officer you thought the 75 mile speed limit sign hour only applied to vehicles produced in 2022 or earlier … we’ll laugh at you,” he said in an interview.

Another potential legal fight that could snare the SEC involves its decision to block the launch of Bitcoin-backed funds that would sell stocks to investors on public exchanges – a way to jack up the price of the digital currency without having to buy it outright. . The SEC has instead opted to greenlight funds linked to Bitcoin futures – a more indirect financial instrument regulated by the Commodity Futures Trading Commission.

Grayscale, a $55 billion investment firm that wants to launch a Bitcoin exchange-traded fund, is building a case that the agency is breaking the law by favoring one model over another.

Last year, the firm instructed Davis Polk attorneys to write a public letter to the SEC claiming that the rejection of a Bitcoin-backed fund would be “arbitrary and capricious.”

“If you’re okay with a futures-based ETF, you should also be okay with an equity-based ETF,” Grayscale chief legal officer Craig Salm said in an interview.

Grayscale did not say whether it would sue the SEC if the agency denied its request for funds.

The cabinet’s argument holds water for some lawmakers, said Rep. Darren Soto (D-Fla.), Member of the crypto-friendly Congressional Blockchain Caucus. Soto and Rep. Tom Emmer (R-Minn.) Urge Gensler to allow companies to offer Bitcoin investment products on regulated exchanges. Grayscale throwing down the gauntlet could help policymakers increase pressure on the SEC, even if it upsets the agency.

“It’s a risky plan, but it’s totally within their rights,” Soto said in an interview.

It’s not a risk that every business will be willing to take. Valkyrie Investments CEO Leah Wald said her company has no plans to pursue the legal strategy previewed by Grayscale, even after the SEC blocked Valkyrie’s own Bitcoin ETF.

“It behooves us as an industry to have a friendlier relationship,” she said.

John Reed Stark, former head of the SEC’s Office of Internet Enforcement, said thwarting the agency’s authority can backfire on companies that could have resolved requests without incident.

After Terraform sued the SEC on procedural grounds for subpoenaing CEO Do Kwon last year, the agency filed a countersuit revealing it was investigating the decentralized finance platform for violating a litany of federal securities laws.

Terraform did not respond to requests for comment.

“It’s very reckless. It is neither bold nor courageous. It’s reckless because it shouldn’t have been like this,” Stark said in an interview. “The SEC dug in. I think they’re on very solid ground.”

Zach Warmbrodt contributed to this report.

Emboldened Crypto Industry Prepares Legal Assault on SEC

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