Author: Phoenix Capital
Abstract Ripple won a partial victory in the programmatic sales part of the case and was exempted from being identified as securities sales; we carefully analyzed the logic of the court's judgment and believed that there may be obvious factual errors in its determination, and it is likely to be overturned later. We analyzed the historical origins and basic connotations of the securities law and believed that tokens with the narrative of "the project party is doing things" are close to the definition of the securities law, so a relatively high proportion of tokens may be identified as securities in the future; but the current SEC's regulatory demands have further exceeded the reasonable scope of the securities law. Staking/yield farming is more likely to be identified as securities than general token sales. Compared with the regulation of CeFi, the regulation of DeFi is at an earlier stage; in addition to the securities law, there are more uncontroversial regulatory issues such as KYC/AML that have not yet been resolved. Even if a large number of altcoins are identified as securities, it will not be the end of the industry. Large-cap tokens are fully qualified to seek compliance in the form of securities; small-cap tokens may exist in non-compliant markets for a long time, but can still indirectly obtain liquidity from compliant markets. As long as there is a clear regulatory framework, no matter what it is, the industry can find new paths and models to achieve long-term development. A long-awaited (temporary) victory - Interpretation of the Ripple case
Ripple Labs received a partial favorable ruling from the New York District Court on July 13, 2023, and the crypto market surged. In addition to XRP itself, a series of tokens previously identified as securities by the SEC also rose sharply.
As we will discuss later, we are still a long way from truly ushering in an era of regulatory clarity in the crypto industry. But there is no doubt that this partial victory of Ripple Labs is still one of the most important things in the crypto industry in 2023.
Here are some of the key disputes between U.S. regulators and the crypto industry before SEC vs Ripple Labs.
It is not difficult to see that almost all major disputes in the past ended with the failure or compromise of crypto companies.
In a sense, this is the first time the crypto industry has achieved a meaningful victory in its war with U.S. regulators, even if it is only a partial victory.
There have been many detailed interpretations of the specific content of this court judgment, so we will not expand on it here; those who are interested can read the long push by Paradigm Policy Director Justin
You can also read the original text of the court's judgment after dinner.
Before we interpret this ruling in detail, let us briefly introduce the Howey Test, the core standard for defining securities in the American legal system that everyone often hears about.
Howey Test, Citrus Groves, and Cryptocurrencies
To understand all of today’s crypto regulatory disputes, we must go back to sunny Florida in 1946, to the cornerstone case of securities jurisprudence today, SEC vs Howey.
(The following story outline was mainly written by GPT-4)
In 1946, just after World War II, W.J. Howey owned a fertile citrus grove in the picturesque Florida.
In order to raise more investment, Howey Company launched an innovative plan that allowed investors to buy citrus groves and lease the land to Howey Company for operation, and investors could get a portion of the profits. At that time, this proposal was undoubtedly very attractive to investors. After all, owning your own land was such an exciting thing.
However, the SEC was not convinced. The SEC believed that the plan provided by Howey was essentially a security, but Howey had not registered with the SEC, which was a clear violation of the Securities Act of 1933. Therefore, the SEC resolutely decided to file a lawsuit against Howey.
The case eventually made its way to the Supreme Court, which made a historic ruling in 1946 in the SEC vs Howey case. The court supported the SEC’s position, ruling that Howey’s investment plan met the definition of a security and therefore needed to be registered with the SEC.
The U.S. Supreme Court made its judgment on Howey's investment plan based on the four basic elements of the so-called "Howey Test". These four elements are: investment funds, expected returns, common enterprise, and benefits from the efforts of the operator or a third party. Howey's investment plan meets these four elements, so the Supreme Court determined that it is a security.
First, the investor invested money to purchase the land for the citrus grove, which met the first element of the "Howey Test" - investment funds.
Secondly, the purpose of investors purchasing land and leasing it to Howey Company was obviously to expect to make a profit from it, which meets the second element of the "Howey Test" - expected profit.
Third, the relationship between the investor and Howey Company actually constituted a joint enterprise. The investor worked together to obtain profits through investment and Howey Company worked together to operate the citrus grove. This met the third element of the "Howey Test" - joint enterprise.
Finally, the profits from this investment plan mainly come from the efforts of Howey Company. Investors only need to invest money and then sit back and enjoy the benefits, which meets the fourth element of the "Howey Test" - the benefits come from the efforts of the operator or a third party.
Therefore, based on these four elements, the Supreme Court ruled that Howey's investment plan constituted a security and needed to be registered with the SEC.
This ruling had far-reaching impacts, and on this basis, the widely cited "Howey Test" was formed, which defines the four basic elements of the so-called "investment contract": investment funds, expected returns, common enterprises, and benefits from the efforts of operators or third parties. These four elements are still used by the SEC to determine whether a financial product constitutes a security.
The above is the accurate interpretation of securities in the 1946 Supreme Court opinion, which can be broken down into the following four commonly used judgment criteria:
The law is really fascinating. It can often use abstract and simple principles to guide the ever-changing specific things in the real world, whether it is a citrus orchard or cryptocurrency.
Why do we have securities laws?
In fact, it is not important how the definition of securities is defined. There is no substantial difference between calling something a security or not. The key is what the legal liabilities are derived from the economic nature of securities, that is, why something with the four attributes of the Howey Test requires such an independent legal framework to supervise it.
The Securities Act of 1933, which was created more than ten years earlier than the Howey Test, clearly explained why securities laws were necessary.
Often referred to as the "truth in securities" law, the Securities Act of 1933 has two basic objectives:
1) require that investors receive financial and other significant information concerning securities being offered for public sale; and
2) prohibit deceit, misrepresentations, and other fraud in the sale of securities.
The starting point of the securities law is very simple - it is to ensure that investors can obtain sufficient information about securities and avoid being deceived. Conversely, the responsibilities it imposes on securities issuers are also very simple. The core is disclosure. Important information related to securities must be disclosed in a complete, timely and accurate manner.
The reason why securities laws have such a goal is because of securities. Since the source of investors' income from holding securities is the efforts of third parties (active participants), third parties have unequal information and influence on securities prices than investors. Therefore, they are required to fulfill their disclosure obligations to ensure that this inequality does not cause harm to investors.
There are no similar regulatory requirements for the commodity market because there is no such third party, or it is easier to understand the name "project party" in the context of crypto. There is no project party for gold, oil, and sugar. The crypto market generally likes the CFTC and hates the SEC, but this is by no means due to the personal preferences of regulators, so there are differences in attitudes towards crypto; the difference between regulating commodities and regulating securities is based on the difference in the inherent nature of the two financial products. Because there is no project party with unequal advantages, the regulatory framework of commodity law is naturally much easier.
The existence of third parties or project parties with information and influence advantages is the fundamental reason for the existence of securities laws; curbing the infringement of investors' interests by third parties/project parties is the fundamental purpose of the existence of securities laws; requiring project parties to make complete, timely and accurate information disclosure is the main means of implementing securities laws.
The project party is doing something = securities?
While studying the history of U.S. securities law, I came up with a simple and effective standard for determining whether a token is a security through a phrase often heard in the crypto industry: whether the investor cares whether the project owner is doing anything.
"The project party is doing something" is meaningful to investors, which means that the return on this investment is affected by the project party's behavior, and it obviously meets the four criteria in the Howey Test. Through this, we can easily understand why BTC is not a security, because there is no project party for BTC, and meme coins are similar. They are just a number in the ledger under the ERC-20 protocol. There is no project party behind them, so they are naturally not considered securities.
If there are project parties that are doing things, and whether they are doing well or not, whether they are doing it or not, whether it is technology upgrades, product iterations, marketing, or ecological cooperation, it will have an impact on the price of tokens, then the definition of securities is established. Because of the existence of project parties, they have information that other investors do not know and have a greater influence on the price of tokens, so they need to be regulated to ensure that they do not do anything that infringes on the interests of investors. "What the project party does is important" → "The project party can cut leeks" → "The project party needs to be regulated by the securities law", this is a very simple legal reasoning.
If you agree with this logic, you can judge for yourself which tokens in crypto are reasonably identified as securities.
We believe that if investors have expectations or concerns about "what the project is doing", the token is highly consistent with the definition of securities. From this perspective, it seems natural that a relatively high proportion of tokens are identified as securities.
**But the current SEC wants more. From Gary's public remarks, he only admitted that BTC is not a security; most other tokens are firmly believed to be securities, and a few tokens such as ETH currently have a relatively vague attitude. **Recently, Coinbase CEO also mentioned in an interview that before the SEC sued Coinbase, it asked Coinbase to remove all tokens except BTC, which was rejected by Coinbase.
We believe that it is unreasonable to classify pure meme coins that are not operated by project parties or pure payment tokens with a high degree of decentralization as securities; **The SEC's demands exceed the reasonable scope of securities laws, **and also make it more difficult for the conflict between the industry and the SEC to be easily resolved.
Back to the SEC vs Ripple Labs ruling, let’s briefly highlight a few key points:
XRP itself is not a security. We need to analyze the different circumstances of XRP sales (i.e. the sales process, method, and channel, etc.) to determine whether it constitutes a security sale. We will elaborate on this later. *A token is just a token. A token is NEVER a security.*
The court analyzed three forms of XRP sales: institutional sales, programmatic sales, and others; and ultimately determined that the first form, institutional sales, was a security, while the other two were not.
Reasons for judging that institutional sales constitute securities sales:
Reasons for judging that programmatic sales do not constitute securities sales:
Ripple Labs has not made any direct promises to these investors, and there is no evidence that Ripple Labs' promotional materials have been widely circulated among these investors.
These investors are less sophisticated and cannot demonstrate that they fully understand that Ripple Labs’ actions can affect the price of XRP.
It is not difficult to see that the court's core argument for programmatic sales is based on the fourth article of the Howey Test, that is, these investors did not expect to profit from Ripple Labs' efforts.
XRP buyer is not expecting to profit from Ripple Labs’ efforts because:
In this case, investors are unclear whether they are buying from Ripple Labs or from other XRP sellers; most XRP trading volume does not come from Ripple Labs’ sales, so most XRP buyers do not invest their funds directly in Ripple Labs.
The ruling of the local court is not final and binding; it is almost certain that the SEC will appeal; but the long legal process required may require us to wait for months or even years to see the new appeal results; during this period of time, the ruling of this court will essentially provide important guidance for the development of the industry.
Putting aside our position as cryptocurrency investors, we believe that the court’s logic for determining that programmatic sales are not securities is not very convincing based on legal logic.
Here are two articles by senior legal professionals who hold similar opposing opinions. I recommend that you read them when you have time. Our analysis also draws on some of the views of these two people.
https://www.linkedin.com/pulse/ripple-decision-cause-crypto-celebration-momentarily-best-stark/
https://prestonbyrne.com/2023/07/13/ripple-labs-ruling-throws-u-s-crypto-token-regulation-into-disarray/
First, we should note that the original text of the Howey Test is ‘…expect profits solely from the efforts of the promoter or a third party…’, which clearly points out that the source of profits can be the promoter or a third party, that is, it is not important who the seller is or it is not necessary for the source of efforts to be the seller or the promoter, as long as there is such a third party. Therefore, it does not matter who the investor buys from or whether the seller is a third party that is the source of the income, as long as the investor recognizes that the appreciation of the asset comes from the efforts of a third party. Therefore, the court mentioned blind buy/sell and mentioned that the buyer did not know whether he bought XRP from Ripple Labs or from someone else, which is irrelevant to the Howey Test.
The essence of the problem remains whether investors in programmatic sales realize that the price increase of the XRP tokens they bought is related to the efforts of Ripple Labs.
The court’s main arguments are that 1) Ripple Labs did not promote directly to retail, and there is no evidence that their materials (white papers, etc.) were widely circulated among retail, and 2) Retail does not have the cognitive ability of institutional investors to realize that the XRP token will be related to the work done by Ripple Labs in technology, products, and marketing.
First of all, this is a factual issue, not a logical issue, and we cannot complete the argument here. XRP is an old project, and we don’t have a clear sense of what the retail investors at that time thought of it.
But from the limited experience we have, for the vast majority of tokens owned by project parties, retail investors are able to realize that a series of things such as project parties doing a good job of technological upgrading, launching the mainnet early, making products more user-friendly, increasing TVL, doing more ecological cooperation, and getting more KOLs to promote products, etc., will have an impact on the price of the tokens they hold.
In the crypto world, KOL, Twitter, and TG groups, big or small, have become the bridge between most project owners and user homes, and the territory for promotion to retail investors. In projects, big or small, we can hear people talking about "community". Most project owners will have a token marketing/community team responsible for contacting exchanges around the world, hiring KOLs, and helping to promote the progress and major events of the project.
We believe that the court’s findings of fact regarding programmatic sales are biased, and we agree with the views of many legal professionals that this part of the judgment is likely to be overturned in the future.
(Just one week after this article was written, on the day it was to be published, we saw that in the case of SEC vs Terraform Labs, the new judge refused to adopt the judgment logic in SEC vs Ripple Labs - the logic is that no matter where investors buy tokens from, it does not affect investors' expectations of the project's efforts in affecting token prices.)
Off topic - Free Airdrop can also be a sale of securities. From John Reed Stark's article. In the Internet bubble in the late 1990s, many companies distributed free stocks to users through the Internet. In subsequent legislation and trials, these actions were identified as securities sales. The reason is that although users did not pay money to exchange these stocks, they paid other values - including their personal information (which must be filled in when registering to receive stocks), and helped the company that distributed stocks gain attention, etc., forming a substantial value exchange.
SEC Enforcement Director Richard H. Walker said at the time, "Free stock is really a misnomer in these cases.While cash did not change hands, the companies that issued the stock received valuable benefits.Under these circumstances, the securities laws entitle investors to full and fair disclosure, which they did not receive in these cases.”
A token is just a token. A token is NEVER a security.
As Coinbase CLO Paul pointed out, this is actually the more important sentence in the entire judgment but is not fully understood by everyone.
Even in the Telegram case, which was very different from the Ripple case, the judges made similar statements. This is the (not so many) highly consistent opinion of the two judges in the two cases:
Both judgments agree on one important point:
Tokens are tokens — not, as many mistakenly believe, the courts have held that XRP is sometimes a security and sometimes not — tokens themselves can never be securities.
What may constitute securities is the entire set of actions (‘scheme’) of selling and distributing tokens. There is no question of whether a particular token is a security, only whether a particular token sale is a security. We can never draw a conclusion on whether it is a security by analyzing a particular token alone, but must analyze the entirety of the sales behavior (‘entirety of …’, ‘totality of crcumstances’).
The two judges, who had significant conflicts of opinion, both insisted that whether the token is a security must be judged based on the sales situation rather than the properties of the token itself. This consistency also means that the possibility of this legal logic being continuously adopted in the future is higher than The judgment against programmatic sales is significantly higher, and we also believe that this judgment is indeed more logically reasonable.
A token is just a token. A token is NEVER a security.
Digital tokens and stocks are fundamentally different. Stocks are a contract between an investor and a company, and their transactions in the secondary market themselves refer to the transaction and transfer of this contractual relationship. Digital tokens, as the judge in the Telegram case said**, are just a digital code sequence ('alphanumeric cryptographic sequence'), which cannot be sufficient to constitute a contract in itself. Only in a specific sales scenario can it have the economic substance of a contract. **
If this legal view is adopted by all subsequent courts, the burden of proof for the SEC in future prosecutions will be greatly increased. The SEC cannot obtain the right to regulate the issuance and trading of all tokens by proving that a token is a security. It needs to prove that the overall situation of each token transaction constitutes a securities transaction.
The Ripple case also clearly pointed out that the court cannot determine whether the secondary sale of XRP constitutes a securities transaction. They need to evaluate the specific circumstances of each transaction to make a judgment. This makes it extremely difficult for the SEC to regulate secondary transactions, and in a sense it may be impossible to complete; this essentially gives the green light to secondary transactions of tokens. Coinbase and Binance.US also re-listed XRP soon after the penalty was announced based on this.
Again, it is too early to conclude that this is the final legal rule based solely on the opinion of this case; however, the legal logic of "A token is just a token" will indeed significantly increase the legal obstacles that the SEC will face in regulating secondary exchanges in the future.
Looking to the future - What are the risks and opportunities? The sword of Damocles hanging over Staking
ETH staking is one of the tracks with the strongest fundamentals in the entire industry since 2023; but the regulatory risks of staking services are still the sword of Damocles hanging over this super track.
In February 2023, Kraken agreed to settle with the SEC and shut down its staking service in the United States. Coinbase, which was also sued for its staking service, chose to continue fighting.
If we go back to the framework of the Howey Test and analyze it objectively, there are indeed sufficient reasons to consider staking services as securities.
Kraken chose to settle. So what is the reason for Coinbase, which insists that staking services are not securities?
Coinbase made an interesting statement, believing that "staking users are not investing, but being compensated for their contributions to the blockchain network."
This statement is appropriate for independent stakers. However, as delegated stakers, they do not directly verify transactions and ensure network security. Instead, they delegate tokens to other node operators and let them use their own tokens to complete these tasks. Pledgers are not direct laborers. In fact, they are very similar to the buyers of citrus orchard land in the Howey case. They own land/capital (ETH) and entrust others to cultivate (node operation) and obtain income.
The expenditure of capital itself is not labor, because the income obtained from the expenditure of capital is capital gain rather than remuneration.
The situation of decentralized staking services will be more complicated, and different types of decentralized staking may ultimately receive different legal judgments.
Most of the four criteria of the Howey Test are similar in centralized staking and decentralized staking. The difference may be whether there is a common enterprise. Therefore, the staking model that puts all users' ETH into the same pool, even if it is decentralized, is obviously very consistent with the four criteria of the Howey Test.
The arguments that helped Ripple win in the Programatic Sales case in the SEC vs Ripple Labs case (buyers and sellers were unaware of each other and there was no direct marketing introduction) seem unlikely to protect staking services here either.
Because apart from the case of purchasing cbETH/stETH directly in the secondary market, when the pledger pledges ETH to Coinbase/Lido and obtains cbETH/stETH at the same time, it is obvious that 1) the buyer knows who the issuer is, and the issuer also knows who the buyer is, and 2) the issuer clearly publicizes its income to the buyer and explains the source of the income.
By the same token, in addition to staking in PoS Chain, various stake/lock token products in DeFi that obtain yield are also likely to meet the definition of securities law. If it is still difficult for pure governance tokens to establish a relationship between the price of the currency and the efforts of the project party, the logic is clear and simple in the context of stake to earn yield. At the same time, even if the reason for programmatic sales not being identified as securities in the Ripple case is difficult to establish here.
1) The user hands over the token to the staking contract developed by the project party, and the staking contract returns the user's income, which comes from the income generated by the project contract opened by the project party;
2) Moreover, in the process of interaction between users and the staking contract, the contract also has a process of directly promoting and explaining the benefits to users (promotion), which is difficult to justify with the reasons in XRP programatic sales.
In general, projects that provide staking services (in PoS chains, in DeFi projects) are more likely to be identified as securities than projects that are generally "doing things" due to 1) clear profit distribution and 2) direct publicity and interaction with users.
Securities laws aren’t the only regulatory risk
Securities law is the focus of this article, but it is important to remind everyone that securities law is only a small part of the entire regulatory framework for crypto - of course, because it is the more stringent part, it deserves special attention. Regardless of whether a token is ultimately considered a security, a commodity, or something else, there are some more fundamental legal responsibilities that are common, and there are many regulators other than the SEC and CFTC who will be involved. The content involved here is worthy of another long article of 10,000 words, and we will only give a simple example here for your reference.
This is the KYC-related responsibility with anti-money laundering (AML) and counter-terrorist financing (CTF) as the core. No financial transaction can be used for financial crimes such as money laundering and terrorist financing, and any financial institution has the responsibility to ensure that the financial services provided will not be used for these financial crimes. In order to achieve this goal, all financial institutions must take a series of measures, including but not limited to KYC, transaction monitoring, reporting suspicious behavior to regulators, keeping accurate records of historical transaction information, etc.
This is the most fundamental and undisputed basic law in financial regulation, and it is also an area jointly supervised by multiple law enforcement agencies, including the Department of Justice, the Department of the Treasury/OFAC, the FBI, the SEC, etc. Currently, all centralized crypto institutions are also complying with this law to conduct necessary KYC for all customers.
The main potential risk in the future lies in DeFi. Is it necessary and possible for DeFi to comply with similar regulations as CeFi, requiring KYC/AML/CTF? And whether this regulatory model may damage the foundation of the value of permissionless blockchain.
From a basic principle, financial transactions are generated in DeFi, so these financial transactions need to be guaranteed not to be used for financial crimes such as money laundering, so the legal necessity of supervision is undoubtedly.
The challenge is that it is difficult to define the regulatory object. In essence, these financial transactions are based on the services provided by a string of codes on Ethereum. So should the Ethereum nodes that run these codes or the project parties/developers who wrote these codes be the regulated objects? (That is why there is the controversial case caused by the arrest of Tornado Cash developers) In addition, the decentralization of nodes and the anonymity of developers also make this supervision idea more difficult to implement. This is a problem that legislators and law enforcement officers must solve. How they will solve these problems is questionable; but there is no doubt that no regulator will allow money laundering and arms trading to be carried out on an anonymous blockchain, even if such transactions account for less than one ten-thousandth of blockchain transactions.
In fact, on the 19th of this month, four senators in the U.S. Senate (two Republicans and two Democrats, so it’s a bipartisan bill) have proposed a legislation for DeFi, the Crypto-Asset National Security Enhancement and Enforcement (CANSEE) Act. The core is to require DeFi to comply with the same legal responsibilities as CeFi:
How to ensure the execution of AML/CTF in DeFi transactions is a regulatory challenge that the industry must face in addition to securities laws. In addition, for example, regardless of whether the token is identified as a security or a commodity, there are strict requirements prohibiting market manipulation. How these issues are resolved in crypto is also a challenge that the industry must face in the future.
Below are some typical forms of market manipulation. I believe that anyone who has traded in cryptocurrencies has experienced more than one textbook example of these behaviors.
What if crypto loses? Securities laws won’t kill altcoins
We do not have enough legal and political knowledge to predict the final outcome of these legal disputes, but objective analysis makes us realize that most tokens are identified as securities in accordance with the logic of US securities law. So we must infer or imagine what the future of the crypto industry will be like if most tokens are identified as securities.
Some tokens will choose to move towards securities compliance
First, from a purely economic perspective, the compliance costs of listing are not that scary. For FDV’s large-cap tokens of 1bn+, they are likely to be able to support it from an economic perspective.
A simple market capitalization comparison shows that there are a large number of tokens with market capitalizations comparable to listed companies, especially tokens with 1bn+ FDV. There is every reason to believe that they are capable of supporting the compliance costs of a listed company.
There are ~2000 companies with a market value of 100mn-1bn in the US stock market, and ~1000 companies with a market value of 1bn-5bn.
In the current altcoin bear market, there are 40~50 crypto tokens with FDV>1bn and ~200 tokens with FDV 100mn-1bn. It is foreseeable that in a bull market, there will be more tokens with market value of 100mn+/1bn+.
We can also refer to some studies on the calculation of compliance costs for listed companies. One that seems relatively reliable is the SEC's previous calculation of the compliance costs for listing of small and medium-sized companies:
The conclusion is ~2.5mn listing cost, ~1.5mn annual ongoing cost; considering the inflation in recent years, 3-4mn IPO, 2-3mn annual recuring cost sounds reasonable estimates; in addition, this number is of course positively correlated with the size of the company itself, and a microcap company with hundreds of millions of dollars should be lower than this average. This is certainly not a small amount of money, but for a large project with a team of hundreds of people, it is not an unacceptable cost.
Relatively more uncertain is how the historical compliance issues of these projects will be resolved.
Stock listing requires auditing the company's historical financial situation. Tokens are not equity, so the required disclosures should be different from stock listings, and a new regulatory framework is needed to make clear definitions. However, as long as there are clear rules, there are ways to adjust and deal with them. Companies with historical financial problems can also obtain listing opportunities through solutions such as restating historical reports.
Although the cost of compliance is acceptable, it is also quite high; so does the project owner have such an incentive to do so? Obviously, there is no simple answer to this question.
First of all, compliance will indeed add a lot of burdens to many project parties and reduce a lot of space for doing things - they cannot do "market value management", cannot do insider trading, cannot make false propaganda, need to announce the sale of coins, etc. This does touch upon the foundation of many business models.
But on the other hand, for projects with large market capitalization in particular, obtaining broader market liquidity, reaching out to more and deeper-pocket investors, and obtaining comprehensive regulatory licenses are important conditions for them to move to the next level, both in terms of market capitalization growth and project development.
"If you cut illegally, you can cut vigorously, but the leek pool is small; if you cut legally, you have to cut with restraint, but the leek pool is large."
As the scale of projects increases, the potential benefits of non-compliant operations vs. the opportunities brought by the vast market and capital that can be accessed after compliance, the balance is increasingly tilted towards the latter. We believe that the leading public chains/layer2 and the leading blue chip DeFi projects will take this step and move towards a completely compliant operation model.
Long-term coexistence and mutual dependence of compliant and non-compliant ecosystems
Of course, most project parties cannot and will not embark on the path of securities compliance; the future crypto world will be composed of compliance and non-compliance, two parts with clear boundaries but closely linked.
Such a coexistence pattern already exists today, but the current compliance ecosystem’s influence in the crypto world is still relatively small. As the regulatory framework becomes clearer, the influence and importance of the compliance ecosystem will become increasingly high - the development of the compliance ecosystem will not only significantly increase the total size of the entire crypto industry, but will also flow through the rise in mainstream asset prices. In the form of sexual spillover, a large amount of blood is transfused into the non-compliant ecology.
Large projects will move towards compliance, and small projects that remain in non-compliant markets can also enjoy the liquidity spillover from compliant markets; the two markets will form an ecological complementarity, and the Securities Law will not be the end of crypto.
Peace is more important than victory
On the judicial side, the SEC vs. Ripple case has not yet been concluded, and the SEC vs. Coinbase/Binance case has just begun - it may take several years for these lawsuits to be settled.
On the legislative side, several crypto regulatory bills have been submitted to the two houses since July, including the Financial Innovation and Technology for the 21st Century Act, the Responsible Financial Innovation Act, and the Crypto-Asset National Security Enhancement and Enforcement. Historically, more than 50 crypto regulatory bills have been submitted to the two houses, but we are still so far away from a clear legal framework.
The worst outcome for the crypto industry is not that most tokens are eventually identified as securities, but the time and space lost, resources and opportunities wasted in the development of the industry in the absence of a clear regulatory framework for a long time.
The escalation and intensification of the conflict between regulators and the crypto industry is good news because it means the time is getting closer for the conflict to converge and be ultimately resolved.
The Ripple Labs verdict was announced on July 13, and the next day, July 14, was the anniversary of the French Revolution, which reminded me of the unrest in France after the end of the revolution; but it was also during that chaotic period that the cornerstone of modern law, the French Civil Code, was finally born. We hope that we can see that although the crypto industry is currently experiencing chaos and turmoil, it will eventually find its own direction and way out and establish a set of norms and codes that can coexist harmoniously with the outside world.
