Original source: Ouke Cloud Chain Research Institute
Original author: Matthew Lee
On September 27, SEC Chairman Gary Gensler participated in the hearing of the US House of Representatives Financial Services Committee. The hearing examined the SECs regulatory developments, rulemaking and activities during the period since October 5, 2021, including the SECs proposal to modify the definition of exchange and expand the SECs authority over digital asset trading platforms. Although Gary Gensler still has a strict attitude towards virtual assets,Its the SEC. Its no longer a piece of metal inside, and the internal staff are exhausted.. Bloomberg’s senior ETF analyst also said,Employees wanted to be freed from their jobs before the shutdown.
Although U.S. regulation has been suppressing the development of the industry, the saving grace is that it is developing a due process legal system that ensures the correct path to correction when things may develop out of control (please refer to the U.S. case caused by the bankruptcy of FTX investors and Asian investors).
In the past three months, the court has ruled on three industry-related cases, namely Risley vs Uniswap, SEC vs Ripple, and SEC vs Grayscale. The results of the rulings are all favorable to the industry.Combined with the series of judgments frequently issued by the judicial department against the SEC, one cannot help but speculate whether the SEC’s “long arm” behavior against virtual assets will be restricted.。
There are details worth discussing in the judgment that highlight the positive factors in the U.S. regulatory environment. Below, we will observe the judicial system’s attitude towards virtual assets and SEC supervision from the details of the recent judicial department’s penalties on virtual assets, and explore the regulatory trends of virtual assets.
TL;DR
Risley vs Uniswap Verdict Points
The courts judgment on Uniswap and Risley attracted the least public attention, but it also contained the most details. It contained some very clear and directional views that can illustrate the courts attitude towards the industry.
Allegation
Risleys accusations against Uniswap Labs and its venture capital companies Paradigm, Andreessen Horowitz, USV, etc. mainly include the following points:
i). The Uniswap platform sells unregistered securities;
ii). Uniswap is an unregistered broker-dealer;
iii). Uniswap Labs makes money through false propaganda.
court response
UniswapsDecentralized architecture makes it impossible to identify fraudulent token issuers, resulting in the absence of an “identifiable defendant” in the case. andSecurities laws directly apply to DeFi, lack of clarity, and there is no federal law that gives courts a way to pursue Uniswap Labs and its venture capital firms. Therefore, the mere fact that Uniswap Labs has the authority to collect transaction fees and other aspects is not enough to determine that Uniswap Labs or the venture capital firm should be held responsible.
Highlights of the verdict
This paragraph is a very important paragraph,The judge believed that the law was not unreasonable, and based on the actual situation and the law, he believed that the lack of registration of tokens with the SEC was a normal phenomenon.. Therefore, many SEC accusations such as violating securities laws by failing to register with the SEC or publish a prospectus or annual report are untenable.
Due to the characteristics of decentralized autonomy, the judge understood the lack of management of Scam Tokens, but as the law gradually improved,Decentralized organizations should also use on-chain tools such as OKLink’s on-chain labeling system, which can remind users of the risks of certain tokens., to avoid legal disputes. Institutions should also consider using on-chain tools to avoid risky interactions when conducting large transactions on decentralized autonomous platforms.
The judge revealed two pieces of informationi). Recognize the legality of smart contracts in the operation process; ii). Recognize the attributes of Ethereum commodities(The SEC claimed that ETH is a security and not a commodity when suing Coinbase).
Due to the lack of laws, decentralized trading platforms are not punished, butThere will be stricter regulations on decentralized organizations, especially trading platforms. Taking Hong Kong and Singapore as examples,Both have strict laws requiring trading platforms to conduct rigorous scrutiny of the tokens traded on their platforms., many platformsFor compliance, we also purchased data labeling services from many on-chain data service providers for the anti-money laundering field.. In the future, decentralized trading platforms will not have too many privileges.
butThe judge’s current conclusion is also clearly different from the previous views of the SEC Chairman.“Most DeFi trading platforms are virtually indistinguishable from traditional exchanges.”
The court also scoffed at the plaintiff’s argument that it cited the SEC.,thinkThe existence of an incentive structure does not prove that the defendant has an interest relationship with the project party.. This perspective can bring some relief to many projects with incentives.
summary
There are two very important pieces of information in the judgment, i). The judge has a very deep understanding of the operating logic and characteristics of decentralized projects; ii). The judge is relatively tolerant of the code operation of decentralized projects and recognizes the legality of smart contract operations. sex.
However, the most important thing is that the decentralized operating model and the lack of legal framework prevent the court from making objective decisions. Several senators have now proposed a new legal framework for virtual assets, KYC, and even decentralized protocols, aiming to clarify the regulatory framework and responsible persons.In the future, decentralized operations will also need to find ways to comply with regulations, and more data service providers like OKLink will be needed to help identify potential Rug-Pull or Pump and Dump situations.
Grayscale vs SEC Verdict Key Points
Allegation
Grayscale accused the SEC of arbitrarily and repeatedly rejecting the listing of Grayscales Bitcoin ETP, but approved the listing of a substantially similar Bitcoin futures ETP.
court response
The SEC neither disputed Grayscale’s evidence that Bitcoin spot and futures markets have a 99.9% correlation, nor suggested that market inefficiencies or other factors undermined the correlation. The judge found that the SEC had inconsistent treatment when dealing with similar products.
Therefore, the judge granted Grayscales request and vacated the SECs order.
Highlights of the verdict
Courts rarely state in decisions that an agency violated the law (the Administrative Procedure Act, APA), and courts use very strong words to suggest that defendants decisions were rash and capricious, or even an abuse of discretion.
In the judgment, very negative words such as Arbitrary and Capricious appeared nine times.
Public opinion was also taken into consideration by the judge. It can be said that in this judgment, the SEC was disliked by almost everyone.
summary
In this 3:0 overwhelming ruling, the judge questioned how Grayscales ETP was fundamentally different from other approved ETPs, allowing the SEC to treat it differently. The SEC was unsuccessful in answering that question.
In response to Grayscale’s judgment, Paradigm’s policy director also brought some additional information: the two judges appointed by Presidents Obama and Carter were very disgusted with the SEC’s arguments, so as Democrats (the Democratic Party is more opposed to crypto assets) they also joined Opinions of Conservative Party Rao. Therefore, the probability of the SEC requesting a joint trial will be very small, because it is likely to anger the court. If the reason for disapproval is raised again, it should be about the companys internal operations, not the hidden dangers of the ETP itself.
SEC vs Ripple Verdict Key Points
Allegation
i). Ripple’s sale of tokens to institutions is suspected of constituting the sale of securities;
ii). Ripple’s sale of tokens to the public on its digital trading platform is suspected of constituting the sale of securities;
iii). Giving away tokens to outsourcing companies is suspected of constituting the sale of securities;
iv). No similar prospectus or updated annual report has been submitted to the SEC.
Since this article extensively uses the Howey test to verify whether it is a security, let’s start with a simple popular science - the Howey test: 1. Whether there is capital investment; 2. Whether it is invested in a common enterprise; 3. Whether it generates profits Have expectations; 4. Whether to obtain additional returns by virtue of the sponsor.
*SEC considers most tokens to meet the second and third criteria.
court response
i). Ripple’s sale of tokens to institutions through contracts constitutes a sale of securities. The court found that institutional funds were purposefully concentrated to develop and enhance the value of XRP. Institutional participation is not blind. Comply with Haowei test standards;
ii). Ripple’s sale of XRP to the public through a “programmed interface” (exchange) does not constitute a sale of securities. The public does not know the source of the token and has no expectation of profit from the issuers efforts (but from other factors, such as market trends), and does not have the characteristics of generating an expectation of profit. Failure to meet the third and fourth criteria;
iii). Distribution through other channels does not constitute the sale of bonds. Because there is no “tangible or definable thing” paid to Ripple, the payment of XRP cannot be considered a sale of securities. The first criterion is not met.
Highlights of the verdict
Ripple proposed an “essential ingredient” test—a “narrow version” of the Howey test—and was undoubtedly struck down by the courts. The judge also demonstrated the logic of determining securities, which is absolutelyIt is not a mechanical application of testing, but is based on protecting investors and based on the analysis of the current situation.. In contrast, the test proposed by Ripple pays more attention to form.
The court held that institutional users clearly understood the terms of the investment contract, and their purchase of XRP did not regard it as a currency or commodity, but as an investment product. Therefore, the sales to the institution were securities sales.
On the contrary, ordinary users do not understand the various SEC documents and Ripples marketing promotions, and they are related to investment returns, so they do not meet the expectation of returns of the Howey test.
Ripple argued that XRP is not a security, but more like ordinary assets such as gold and silver, so it does not have the commercial nature of a security. The court did not recognize the relational logic of XRP. becauseThe court held that even commodities can be sold in the form of investment contracts.
Many projects also claim that their tokens are not securities, but utility tokens, but they neverFrom the courts perspective, although it is effective, it does not prevent it from being recognized as a security.
summary
Unlike the one-sided support of Grayscale and Uniswap, although the judge took a more positive attitude towards the virtual market, the court still made some rulings that were favorable to the SEC. For example, the Howey test should not be formalistic, and this ruling to a certain extent Comply with how the SEC defines securities. It is difficult for projects that claim their tokens are “utility” tokens to stand up in court.
What puzzles me about this judgment is that tokens sold to institutional investors are deemed securities because institutional investors are aware of the investment regulations and the source of the sales, while retail investors are unclear. However, the “original intent” of securities is determined to be"It’s investor protection that retail investors don’t get. And according to this logic: If tokens are sold through an exchange, then securities laws do not apply. Can retail investors who purchase tokens on the trading platform not be protected?
Regulatory signals revealed by the judgment
There are some unreasonable aspects in several judgments, which demonstrate the bias of the judicial department towards the industry, and also highlight the characteristics of mutual checks and balances within the United States. In the past few years, the SEC has taken radical measures in an attempt to expand its jurisdiction regarding whether virtual currencies are securities. However, before the legislative branch has taken formal action, the judicial branch has begun to vigorously crack down on the executive branchs arrogance.
As an example specifically used by the SEC to issue a warning to the industry, Ripple has not succeeded in establishing authority, but has instead given the industry a great gift. As a country represented by case law, Ripple vs SEC will give a clearer direction to the industry that lacks definitions and legislation in the future., specifically pointing out that tokens sold programmatically do not belong to securities as defined by the SEC.
Although the Uniswap ruling has nothing to do with the SEC, it reveals the court’s attitude:Decentralized projects are different from ordinary companies, and tokens cannot be confused with company securities.. The judge in the case, Katherine Failla, serves as the judge for the SEC and Coinbase cases. The market is also very optimistic that Coinbase will dismiss the SECs lawsuit.
If the cases of Ripple and Uniswap are the judicial department’s overture to the industry,Then Grayscales penalty was a blow to the SEC.. With an overwhelming verdict of 3:0, both the Radical Party and the Conservative Party revealed their disappointment with the SEC.
The hearing held yesterday also sent a signal to the industry.The SEC’s strong supervision will be restricted, and the legislative branch will follow closely to clarify the regulatory framework.. Although supervision will not be completely relaxed, future law enforcement will be more law-based. I believe that members of Congress will not give up this opportunity to promote their own ideas in the virtual currency industry and seize political capital. There will be a lot of ETF applications in October, and these applications have already put strong political pressure on the SEC. Combined with the recent rising in the east and falling in the west brought about the lull in the Permissionless conference, it is hammering the SEC. If it continues to take unreasonable measures Measures will be abandoned by popular sentiment and political resources.
