Money in investment sense only exists when investors transfer definable and tangible consideration to entrepreneurs.
Source: Empire (Youtube)
In a recent episode of Empire, Santi invited Rebecca Rettig, Chief Legal Officer at Polygon, and Jake Chervinsky, Chief Legal Officer at Blockchain Association, to discuss the milestone Ripple case and its significant impact, explore its implications on future legislation, token sale practices, decentralization, and governance, and obtain the latest information on MiCA and EU regulations.
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Host: Santi, Empire
Speakers: Rebecca Rettig, Chief Legal Officer at Polygon; Jake Chervinsky, Chief Legal Officer at Blockchain Association
Video Source: Empire Podcast
Podcast: Link
Published Date: July 20th
About the Ripple Case Itself
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Rebecca Rettig explained the background of the Ripple case and the court’s judgment. The case was heard in a local court in the Southern District of New York and involved whether Ripple sold securities without authorization. The court conducted a detailed factual review and supported the SEC’s views to some extent while also supporting Ripple’s views to some extent.
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Rebecca explained that the case involved three basic types of sales: institutional sales (selling tokens to VCs, etc.), programmatic sales (Ripple selling XRP on centralized exchanges where buyers and sellers don’t know each other’s identities), and other distributions (such as distributing XRP as a form of payment or through the Spring program).
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The court found that Ripple conducted unregistered securities sales in institutional sales, which aligns with the outcomes of the Kik and Telegram cases in the Southern District of New York. However, in programmatic sales, the court found that these were not unregistered securities sales, partly because buyers didn’t know they were purchasing from Ripple.
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In addition, the court also found that giving tokens to employees does not constitute unregistered securities sales because there is no actual consideration exchange, and similarly, the grant program under the Spring program does not constitute unregistered securities sales.
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Jake Chervinsky provided further interpretation. He emphasized that the outcome of this case is a huge victory because it clarifies that the SEC’s theory underlying its actions is flawed: if a token was originally sold as an investment contract, then the token itself represents a security. However, the court believes that investment contract analysis should focus not on the asset itself but on the transaction behavior.
Potential Impact of the Ripple Case
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Jack believes that the biggest winners of this decision are the exchanges. Previously, the SEC’s view was that these tokens represented investment contracts, making them securities, and when Coinbase created a secondary market by listing these tokens for trading, Coinbase violated federal laws. Now, based on this ruling, the situation may not be as clear-cut.
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Jake also discussed the impact of this decision on airdrops. He believes that money in investment sense only exists when investors transfer definable and tangible consideration to entrepreneurs. This means that if you receive an airdrop and you haven’t given the creator and distributor of the token any assets, then you don’t have investment money. Therefore, he believes that according to this decision, these airdrop distributions would not be considered securities.
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Then, host Santi asked Rebecca Rettig for her views on airdrops and whether the SEC or other regulatory agencies might argue that because you spent energy, capital, and opportunity costs to obtain the airdrop, you are actually making an investment.
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Rebecca responded that this viewpoint may have some basis, however, in the Ripple case, the judge believed that there was no money exchange involved, which differs from other court views.
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Finally, Santi asked Rebecca for her thoughts on whether the SEC would appeal this decision and whether this decision can be considered a victory. Rebecca expressed caution, as the decision could be overturned.
Future Development and Regulatory Changes in the Ripple Case
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Rebecca explained that both the SEC and Ripple can only file an appeal after all the issues in the case are resolved. She believes that whether the SEC will appeal is unknown, but she noted that there is currently a trend of change in policies and regulations.
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Jake agrees with Rebecca’s point of view that even if the SEC appeals after the case is concluded, it may take several months or even years, so discussing the possibility of an appeal now is not worth it.
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Jake stated that he believes the SEC may think twice before taking further enforcement actions because this decision is embarrassing for them.
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Finally, they discussed the impact of the Ripple case on other proposed bills and regulations. Rebecca stated that the decision in the Ripple case had a significant impact on her meetings with Congress, and she believes that it has changed many things and confirmed many practices in the cryptocurrency industry.
Implications for Other Cryptocurrency Projects and DAOs
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Rebecca and Jake both emphasized that this decision does not mean that no token can be considered a security. They pointed out that the key to the decision is that the token itself does not represent an investment contract, but rather the manner of the investment contract.
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They also reminded the audience that even if a token has been traded on the market for years and has an active secondary market and a functional network, if the development company continues to promise investors that they need more funding to further develop the network, then this transaction may be considered a securities transaction.
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The impact of the Ripple case on projects that have conducted private rounds and airdrops is that if you have conducted an initial transaction that explicitly exempts registration requirements, such as selling only to accredited investors and applying appropriate lock-up periods, then you don’t need to worry about whether your transaction is a securities transaction because you know the law doesn’t apply.
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They pointed out that a token may represent an interest in an entity that could be regarded by the court as an intangible association responsible for operating a protocol as a business. This ruling did not resolve the issue of DAOs because the responsibilities and legal status of DAOs are still unresolved.
Progress of Digital Asset Related Laws and Regulations in the US and Europe
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They noted that the McHenry Thompson Bill may be submitted for a vote in the House of Representatives in the fall of this year, but progress in the Senate may be more difficult as the Senate is controlled by the Democrats, and the Democrats are relatively less interested in cryptocurrency-related legislation.
(Note by DeepChain: The McHenry Thompson Bill, proposed by Republican legislators Thompson and LianGuaitrick McHenry, namely the Digital Asset Market Structure Act, attempts to propose a new regulatory framework that categorizes cryptocurrencies as securities or commodities and is regulated by the US Commodity Futures Trading Commission (CFTC) or the US Securities and Exchange Commission (SEC).)
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Then they discussed the content and objectives of the stablecoin bill. This bill aims to create a regulatory framework for stablecoin issuers, which is beneficial for stablecoins like USDC. They pointed out that the details of this bill are still under discussion, but there is a great need in the industry for a framework to comply with, so the outlook is positive.
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The two speakers also discussed the European MiCA regulation. They noted that the MiCA regulation has become law, but the European Securities and Markets Authority and the European Banking Authority still need to develop implementing technical standards.
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Finally, they emphasized the importance of political activism. They encouraged the audience to contact their representatives and tell them that you care about cryptocurrencies and why this issue is important to you. They believe that this is crucial for getting politicians to pay attention to this issue, especially for the younger generation who are highly concerned about this topic.
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