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SECs Moves to Appeal Ripple's Victory on XRP Classification

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The U.S. Securities and Exchange Commission has made its move against the recent judgment favoring Ripple’s cryptocurrency, XRP. The SEC now contends that XRP should be viewed as a security.

This legal tussle traces back to a July 13 order when the court determined in partial favor of the defendants when Judge Analisa Torres regarded its sales of XRP tokens on exchanges and through algorithmic procedures not deemed as investment contracts.

The SEC, however, brings the Howey test into play when it released a statement one week later. Originating from the SEC v. W.J. Howey Co. in 1946, this test becomes the touchstone to categorize transactions as “investment contracts” or securities, a distinction that comes with significant regulatory implications:

“With respect to the Programmatic and other sales, the SEC respectfully avers that Ripple conflicts with and adds baseless requirements to Howey and its progeny. Respectfully, those portions of Ripple were wrongly decided, and this Court should not follow them.”

Interestingly, the court’s decision identified nuances in XRP sales. It highlighted that when acquired via digital exchanges, it wasn’t evident if XRP buyers expected profits based on Ripple’s actions or even if they knew their funds reached Ripple directly.

Drawing parallels, the SEC refers to a contrasting verdict from the SEC v. Terraform Labs case. Observers note that these inconsistent judgments from the same jurisdiction spotlight the potential “room for disagreement,” adding weight to the SEC’s appeal:

“As noted, one court in this District has expressly ‘reject[ed]’ the Order’s approach as to Programmatic Sales, reasoning that ‘Howey makes no such distinction between purchasers’ for purposes of determining whether investors had reasonable expectations of profits from the issuer’s efforts.”

Ripple’s On Demand Liquidity sales are also under scrutiny. While the court did find some of these sales in violation of Section 5, Ripple offered a counter-narrative, questioning whether all ODL sales can be said to have a “US nexus.” If Ripple turns to the Morrison v. Nat’l Australia Bank case as a defense, it could introduce another dimension to the dispute:

“Substantial discovery could be necessary to determine the validity of such claims. Ripple itself has accordingly proclaimed that the conclusion of the suit could ‘take years.’”

The appeal’s undercurrent suggests the SEC’s intent to bring more clarity to the cryptocurrency space under U.S. securities legislation. The outcome could set precedents for other digital assets, making this a landmark case in the digital currency ecosystem.

The stakes are high, as a concrete definition of a security in the crypto arena could redefine the industry, affecting a vast expanse of transactions and investments.

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Cameron Winklevoss slams SEC’s bitcoin ETF rejection

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Cameron Winklevoss, a co-founder of Gemini, has expressed his disappointment with the the latest decision by the US Securities and Trade Fee (SEC) to reject a bitcoin exchange-traded fund (ETF). In accordance to Winklevoss, this conclusion is a important setback for traders in the United States.

Winklevoss argues that the SEC has been steering buyers toward unregulated and potentially hazardous cryptocurrency goods for the past 10 years. It has been ten years since the Winklevoss twins initial sought approval for their ETF from the SEC, and on July 2, they criticized the SEC for consistently denying location bitcoin ETFs.

Currently marks 10 several years considering the fact that @tyler and I filed for the 1st spot Bitcoin ETF. The @SECGov‘s refusal to approve these merchandise for a decade has been a comprehensive and utter disaster for US investors and demonstrates how the SEC is a failed regulator. This is why:

-“shielded”… pic.twitter.com/xmK1xo1iX8

— Cameron Winklevoss (@cameron) July 2, 2023

Industry commentators have echoed these sentiments, stating that the SEC’s refusal to approve these offerings about the past ten years has had disastrous effects for US investors and demonstrates the regulatory body’s failure in its part.

Winklevoss highlights that as a outcome of the SEC’s steps, US investors have been forced to switch to risky possibilities like the Grayscale Bitcoin Rely on (GBTC). GBTC trades at a considerable low cost to the genuine Bitcoin cost and prices superior fees due to the absence of an approved place bitcoin ETF.

YCharts facts reveals that GBTC trades at a 30% lower price to the bitcoin price tag, with an yearly cost of 2%, far bigger than the normal payment claimed by MorningStar’s investigation.

Winklevoss argues that the SEC’s reluctance to approve place bitcoin ETFs has driven American funds towards unlicensed and unregulated offshore platforms, like FTX, which he describes as a substantial economic rip-off.

Supplied the SEC’s track record, Winklevoss believes the agency must focus on safeguarding investors’ pursuits somewhat than exceeding its authority and performing as an financial gatekeeper.

https://www.youtube.com/look at?v=MD9k7wDMeu0

A number of providers, together with BlackRock, Fidelity, WisdomTree, Invesco, Valkyrie, and ARK Spend, have not long ago submitted or up to date their apps for a place bitcoin ETF. Nonetheless, the SEC has considered some of these filings inadequate and lacking clarity, top the regulatory entire body to request that fund managers resubmit their applications with clearer textual content.

Meanwhile, Grayscale, the business driving GBTC, is presently engaged in a lengthy mediation method with Gemini, a subsidiary of Electronic Currency Group (DCG). In addition, the SEC has submitted quite a few costs from Gemini in court docket.

The rejection of the bitcoin ETF by the SEC and the subsequent repercussions spotlight the ongoing problems and debates bordering cryptocurrency regulation in the United States. Buyers and industry contributors are intently seeing for developments that may well shape the country’s long run of cryptocurrency expense options.

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The SEC's odd pick: Unmasking Prometheum

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The following is a guest post from Hamilton Keats, CEO and co-founder of Krayon Digital.

In an attempt to demonstrate that there’s a path forward for crypto firms within the existing regulatory framework, the SEC extended an invitation to Prometheum to the House Financial Services Committee hearing on digital assets.

This firm, relatively unknown until now, is being held up as an example of compliance by the SEC but Prometheum’s background is sketchy. It’s alleged that the firm is connected to multiple crypto scams and possibly funded by the Chinese Communist Party (CCP) 😲.

The timing of this hearing dovetails with a season of intense scrutiny by the SEC against other firms who have strived regulatory dialogue – firms who arguably deserve a better chance than Prometheum at operating within a compliant framework.

Let’s unpack this bizarre series of events

On June 13th, the House Financial Services Committee held a hearing on “The Future of Digital Assets: Providing Clarity for the Digital Asset Ecosystem.”

Aaron Kaplan, Co-CEO of Prometheum, was invited to testify before the committee. Until this week, Prometheum was relatively unknown in the crypto space.

During Kaplan’s testimony, it became evident that his responses were scripted. Committee members and viewers alike questioned his credibility; his answers echoed the SEC’s existing narrative. As Scott Johnsson remarked:

“Wow, Prometheum’s CEO, whose sole credential is heading a special purpose ATS/BD for digital securities, seems to have a lot of opinions on unrelated topics like banking principles/stablecoins-or at least his prewritten notes curiously respond to every Dem question.”

Who exactly is Prometheum and why are they relevant to this committee?

In the midst of the SEC’s litigation case against Coinbase and Binance, Prometheum received approval for a first-of-its-kind Special Purpose Broker-Dealer (SPBD) license for digital asset securities. According to Kaplan, this license represents a compliant path for crypto firms, suggesting no need for updated regulations and securities laws.

Committee member John Rose disputed Arron Kaplan’s statements:

“Gensler’s approval of this one special purpose broker dealer licence does not mean that the current system is working. Why? Because an ATS cannot facilitate trading for any of the unregistered securities not offered under a valid exemption. Additionally, Gensler and the Democrats and apparently Mr Kaplan allege that nearly all tokens are unregistered securities so this approval does nothing for retail investors and the general public… Isn’t it correct that there currently aren’t any registered digital asset securities with real customer demand and liquidity. For example, can an ATS offer Solana or Cardano, which the SEC has recently alleged are unregistered securities, to retail, non-accredited investors on its ATS today?”

The answer is a resounding no. However, the proposed legislation would allow an ATS to list and trade digital assets alongside payment-stable coins and digital commodities.

It gets worse

A special purpose broker-dealer cannot currently custody both digital asset securities and commodities on the same platform on behalf of retail investors. With the existing law classifying digital assets either as securities or commodities, it renders the SPBD license essentially useless.

Moreover, the SEC has suggested that they expect digital assets to be registered by promoters, a non-issue in a world of open-source projects with anonymous or pseudonymous founders.

There are currently zero tokens registered with the SEC because the existing regime is unfeasible for public blockchain networks.

The existing regulation doesn’t enable licensed broker-dealers to operate in the digital asset space. Representative Mike Flood rebutted Prometheum’s statements during the hearing as purely nonsensical. Prometheum’s clients can’t even trade BTC and ETH, which comprise 60% of the digital asset market.

As Mike Flood put it:

“If the current system is working, why can’t your customers trade the most popular and widely-used digital assets?”

The obvious answer is that it’s not, and Prometheum’s claims that changes to legislation aren’t required just don’t make sense.

Why is Prometheum obstructing regulatory improvements?

If Prometheum allegedly works to establish a broker-dealer business in the digital asset space, why are they obstructing proposed regulatory improvements that would benefit the industry?

Enter Prometheum Chain: Prometheum’s trading L1 has its token that’s already been sold to members of the Chinese Communist Party (CCP) (laughing emoji).

Prometheum has raised almost $50m in funding to date. Throughout the fund raising process, they used a New Jersey-based boutique investment bank, Network 1 Financial Securities – a firm with an unscrupulous track record, including over 20 regulatory or civil actions against them, and has further ties to the CCP.

Maybe we should assume credible securities experts manage Prometheum…

Well, that’s a no again. Prometheum is run by the Kaplan family, including Aaron and Benjamin Kaplan, lawyers by trade who attended a now unaccredited law school before joining their father’s law firm.

How did a family of lawyers become the first firm approved for an SPBD license and end up on the committee testifying in favor of the SEC’s current approach to crypto-regulations?

Why aren’t real businesses being given a fair shot?

Apparently, Hiring ex-SEC staffers goes a long way to getting licensed. Prometheum’s team comprises Rosemarie Fanelli, a former NYSE and FINRA employee; John Tornatore from CBOE; and Joseph Zangri, their Chief Compliance Officer previously served as a Senior Enforcement Attorney for the SEC.

This tangled web of convoluted narratives and potential improprieties begs the question: is the deck stacked against the genuine progress of blockchain technology and digital assets in the face of current regulation? Why aren’t real businesses like Coinbase and Kraken given a real shot?

Hamilton Keats is CEO and co-founder of Krayon Digital, a provider of MPC-based digital asset wallets for SMEs. Prior to building Web3 infrastructure with Krayon, Hamilton co-founded Platform One, a London-based wealth management platform, and worked at HSBC and DVB Bank. He holds a BSc degree in physics from the Imperial College London. Twitter 

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