U.S. Securities and Exchange Commission (SEC) Commissioner Hester Peirce said the SEC could do better on clarity on regulation and that enforcement isn’t always the best way to provide guidance. Peirce made her first public remarks since the SEC’s lawsuit against Ripple in an exclusive interview with Forkast.News Editor-in-Chief Angie Lau.
In December last year, the SEC filed a lawsuit against cryptocurrency platform Ripple Labs Inc., its CEO Brad Garlinghouse and Chairman Chris Larsen for allegedly raising over US$1.3 billion through the sale of digital assets known as XRP in an unregistered securities offering. The lawsuit also said that Larsen and Garlinghouse “effected personal unregistered sales of XRP totaling approximately US$600 million.”
SEC charges Ripple and two executives with conducting $1.3 billion unregistered securities offering https://t.co/3VP23RpSyV— SEC_News (@SEC_News) December 22, 2020
“I don’t want to speak to any particular cryptocurrency, whether it’s in litigation with us or not in litigation with us. But I think everyone has to look at the facts and circumstances,” said Peirce.
Peirce declined to comment specifically on the Ripple lawsuit given the ongoing litigation, and expressed that her views were her own and not necessarily those of the SEC or her fellow commissioners.
The SEC’s enforcement action over Ripple has led to heightened concerns in the crypto industry over the lack of regulatory clarity, with Ripple’s CEO saying, “We’ve moved from lack of regulatory clarity to regulatory chaos in the U.S.” in a Twitter thread on some of the questions surrounding the SEC lawsuit.
We’ve moved from lack of regulatory clarity to regulatory chaos in the U.S. This is why regulation by enforcement is such bad public policy. With the new administration, we expect #DCEA to be reintroduced – common-sense legislation providing clarity to the entire industry. 5/10— Brad Garlinghouse (@bgarlinghouse) January 7, 2021
Five SEC commissioners vote on adopting rules or authorizing enforcement actions with three commissioners required for a quorum. “In enforcement actions, it’s often a unanimous vote, but it’s sometimes not — once that vote has been taken, the litigation moves forward,” Peirce said.
“Often, you’ll see that the litigation ends in a settlement — sometimes it goes through and the litigation actually plays out in court.”
A statement sent by Ripple in response to Forkast.News’ request for comments regarding the SEC’s lawsuit stated that the SEC’s decision to file this action is not just about Ripple, it is an attack on the entire crypto industry here in the United States. “We’ve always said that there is a dangerous lack of regulatory clarity for crypto in the U.S. — their lawsuit has already affected countless innocent XRP retail holders with no connection to Ripple.”
According to Ripple, the lawsuit has muddied the waters for exchanges, market makers and traders. “The SEC has introduced more uncertainty into the market, actively harming the community they’re supposed to protect.”
Is XRP a security or not?
A central question has been whether XRP is a currency or security. XRP was determined to be currency by the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) as a digital currency in 2015, but the SEC’s lawsuit is at odds with that definition.
On the apparent misalignment among U.S. agencies causing confusion in the industry, Peirce said that each agency had its own rulebook to follow.
“I think that’s not only a problem with respect to digital assets, it’s actually a broader problem because we have this very open-ended category called an ‘investment contract’,” said Peirce. An investment contract is defined by the SEC under the Howey Test as an investment of money in a common enterprise with a reasonable expectation of profits to be made through the work of others. According to Peirce, it is designed to capture anything that looks like a security and acts like a security, but might not be called a stock or a bond. “So something might be characterized as one thing by another agency, yet still be a security under our rules, and that can be frustrating for people,” said Peirce.
“That’s why I have called for more clarity, because I actually think it can be difficult to determine whether something fits within the security bucket or not, and we could do more to provide some guideposts for what that would be,” she added.
In his Twitter thread, Garlinghouse said that Ripple had tried to settle with the SEC, and “will continue to try with the new administration – to resolve this in a way so the XRP community can continue innovating, consumers are protected and orderly markets are preserved.”
Q: Why didn’t Ripple settle with the SEC?— Brad Garlinghouse (@bgarlinghouse) January 7, 2021
Can’t get into specifics, but know we tried – and will continue to try w/ the new administration – to resolve this in a way so the XRP community can continue innovating, consumers are protected and orderly markets are preserved. 2/10
A pre-trial conference between Ripple and the SEC has been set for February 22. The lawsuit poses a risk to Ripple as cryptocurrency exchanges will not list XRP if it is deemed a security.
Market reactions following the SEC suit
Following the news of the SEC’s lawsuit, major crypto exchanges have suspended or delisted XRP. Despite the ongoing crypto bull-run, XRP is now trading around US$0.30, a 91% fall from its all time high of US$3.40. The Ripple community has also attempted to get the federal government’s attention on the SEC’s complaint – over 37,000 people have signed an online petition requesting that XRP be recognized as a currency.
Digital asset manager Grayscale Investments announced that it sold all XRP in its Digital Large Cap Fund at the end of December. Tetragon Financial Group, a major investor in Ripple which led their series C funding round, has also sued the company in a bid to redeem its Ripple equity following the SEC’s legal action. In response, Garlinghouse said in a tweet that “we’re disappointed that Tetragon (who owns 1.5% of Ripple) is seeking to unfairly advantage itself through the SEC’s allegation.”
Q: Do investors have faith in Ripple?— Brad Garlinghouse (@bgarlinghouse) January 7, 2021
Yes, we have real shareholders. That is how you own Ripple equity – buying our stock, not buying XRP. We’re disappointed that Tetragon (who owns 1.5% of Ripple) is seeking to unfairly advantage itself through the SEC’s allegations. 7/10
Guidance through clarity on guidelines instead of enforcement
On the direction of crypto regulations in 2021, Peirce said, “a lot is going to depend on who the chairman is under President Biden, and that will help determine the direction that the Commission goes on a lot of issues, but cryptocurrency being one of them.”
Acknowledging that “the SEC hasn’t done a fantastic job in getting out in front and setting clear lines for crypto and other countries have been much faster to do that,” Peirce highlighted that the SEC was taking steps to provide greater regulatory clarity, such as the recent call for feedback on the custody of digital asset securities by broker-dealers.
“Enforcement actions can indeed provide clarity, but it’s not the right way to do it from my perspective,” she said. “We want to provide people clear guidelines ahead of time and then they can figure out how they can do something so that it is legal.”