SEC, XRP, Ripple, Digital Assets, Currency, Securities
The tension and associated time lag between technology and regulation has been well documented. Paradigmatic of this phenomenon is the global evolution of blockchain technology and digital assets. Digital assets in the blockchain allow users to transact directly without financial intermediaries. However, the regulatory guidelines for the assets, their issuance, and the subsequent transactions are unclear. The Securities and Exchange Commission (SEC) has filed an action to apply its existing regulations and the judicial interpretations to Ripple’s issuance of XRP, its token, and Ripple’s control over subsequent user transactions of XRP. This Note uses SEC v. Ripple as a case study to determine how digital assets are treated for securities purposes. It will also discuss the general regulatory and policy concerns of digital asset transactions. SEC regulations require disclosures and minimize price manipulations to protect users and market integrity. The SEC has provided a framework, and Chairmen and Commissioners have given speeches regarding how digital asset transactions on exchanges would be regulated. However, the SEC has mainly used litigation to enforce its jurisdiction over certain digital assets by applying the Howey test; thus, its guidelines are based on an amalgamation of the facts and circumstances from different cases instead of what they should be: a robust regulatory framework specifically and thoughtfully tailored to how these digital assets might be regulated as users transact. This note reasons that regulatory clarity is necessary for this industry to flourish.
Digital assets may be issued as a security but after time, as the digital assets are transferred between users and the network decentralizes, they begin to function more like a consumer token. Not only are digital assets valuable to society, but they are also transforming the financial industry. The Commodity Futures Trading Commission (CFTC) has also offered guidance on how it would regulate digital assets within its jurisdiction. Yet, the question remains which digital assets fall under CFTC jurisdiction, which are in the SEC’s jurisdiction, and how the digital asset community can know the difference. To provide greater clarity, this Note argues that the SEC should adopt Commissioner Hester Peirce’s Safe Harbor Proposal 2.0, which proposes monitoring these digital assets while allowing sufficient time for decentralization. If decentralized, the digital asset would be regulated by the CFTC, and, if not, the digital asset would be regulated by the SEC.
Jacqueline Hennelly, The Cryptic Nature of Crypto Digital Assets Regulations: The Ripple Lawsuit and Why the Industry Needs Regulatory Clarity, 27 Fordham J. Corp. & Fin. L. 259 (2022).