This was followed in February by a settlement with another exchange, Kraken, which agreed to halt its crypto staking service in the US, and a threat to sue crypto firm Paxos over its BUSD stablecoin. In both instances, the SEC again claimed the parties were in breach of securities laws. In a statement, Paxos wrote that it “categorically disagrees with the SEC.”
However, the agency has suffered setbacks over the past few weeks in bids to block crypto exchange Binance from purchasing the assets of bankrupt crypto lender Voyager Digital, and asset management firm Grayscale from bringing to market a bitcoin exchange-traded fund (ETF).
Because the case is being held in a district court, the outcome will not set a “binding precedent,” says James Filan, a defense lawyer and former federal prosecutor. Therefore, the verdict is not required to be factored into judgments on similar cases moving forward. However, the judgment may establish what’s known as “persuasive precedent,” he says, which could influence the thinking of judges in future cases.
If the SEC were to win, it would be handed the advantage in its “turf war” with the CFTC, Filan says. The crypto industry will not escape supervision in either scenario, but the CFTC is seen by the exchanges (including FTX) as a soft touch by comparison.
If the SEC is established as crypto’s main regulator, companies may need to register their US-facing services with the agency. But many crypto firms have had a “hall pass” to operate in gray areas, says securities attorney Aaron Kaplan. An SEC victory would mean they have to disentangle their various business lines to meet regulatory requirements.
“This would be very difficult for many crypto companies to accomplish,” Kaplan says. “As such, [they] could choose to move and operate outside the US … Those that don’t will need to evolve and come into compliance—or die.”
Ripple has already announced it will appeal in the event of a loss. Doing so would send the case to the Second Circuit—and then potentially the Supreme Court. Alderoty does not expect the SEC to appeal, but instead to argue the result was an aberration. However, Filan suspects the agency will feel it has little choice if it hopes to preserve its claim to jurisdiction.
As a consequence of the lawsuit, Alderoty says, Ripple has been forced to pull back on efforts to expand in the US and focus instead on other territories, like Singapore. Since the charges were brought, the firm has chosen to operate practically “as if the SEC has won,” to ensure the business remains viable no matter the outcome. If Ripple wins the case, it will be able to lean back into the US.
Crypto markets are likely to react to the judgment when it comes, as traders price in either a renewed clarity over the legality of crypto services provided in the US, or the prospect of further enforcement action.
“We know the crypto market will quickly incorporate the verdict, and token prices will almost certainly be affected,” says Katherine Snow, director of legal at crypto research firm Messari.
Nobody knows precisely when the verdict will land; it could be days, weeks, or even months. Until then, the crypto industry must wait, because “anybody trying to predict the outcome,” Filan says, “is either going to be lucky or wrong.”
