A final judgement on the SEC vs Ripple lawsuit is unlikely to impact the industry due to SEC’s reliance on enforcement as the regulatory tool, legal experts have argued.
In a recent piece titled “Regulation by Enforcement in the Digital Asset Industry: A Lagging Response to Stale Facts”, Karen Ubell, Mitzi Chang, and Adam Bruce of the Goodwin law firm shed light on the ineffectiveness of regulation by enforcement in the digital asset industry. The experts particularly argued that the focus on enforcement actions by the Securities and Exchange Commission (SEC) had done little to clarify regulatory expectations concerning current facts and market practices.
“SEC’s enforcement approach with respect to the digital asset industry now resembles carpet-bombing efforts rather than strategic or targeted actions intended to signal principled policy positions, as was more typical of the SEC under its prior leadership,” they said.
According to the experts, while enforcement actions are essential in sanctioning fraudulent actors and protecting investors, their utility as a means of conveying prospective regulatory expectations is limited. Moreover, they argued that enforcement actions and litigation are inherently backwards-looking, often addressing factual scenarios and market trends that are no longer prevalent in the industry.
They highlighted the ongoing SEC vs Ripple case as an example of the limited utility of enforcement in conveying regulatory expectations. In their view, the facts alleged by the SEC in the case align with early ICO boom characteristics. At the same time, the current market practices around protocol and digital asset launches have evolved significantly. The legal experts thus argued that the outcome of the Ripple litigation would likely have limited implications for the blockchain and digital asset industry.
“The application of the laws implicated by protocol and digital asset launches-including the Securities Act of 1933 and its interpretation in Howey and its progeny-is always highly dependent on the facts and circumstances surrounding the offer and sale of the alleged security. Thus, while the outcome of the XRP litigation will undoubtedly be of significance for Ripple and XRP holders, the implications for modern launch plans and digital asset distribution models with materially different facts are likely to be limited,” they added.
However, advising the SEC, the lawyers emphasized two primary tools for implementing mandates and regulating markets. The first is making rules and guidelines that look ahead and provide expectations for the future while the second tool is enforcement actions that apply existing rules and regulations through taking action against those who break the rules that already exist.
That said, with many viewing SEC’s enforcement actions as disorderly and unclear in terms of policy signals, a court decision in the Ripple case could offer precise guidance regarding regulatory expectations for the digital asset industry.