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The SEC’s Crypto Rampage Is Weakened By Looming Legal Battles

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Gary Gensler, the chairman of the Securities and Exchange Commission, has vowed to rein in what he calls “Wild West” abuses in the $1.6 trillion market. Following a trading boom in Bitcoin and other digital assets, industry leaders are directing their lawyers at the sheriff of Wall Street in an intensifying legal battle.

Ripple, the de facto leader of the revolt, has begun to rack up procedural court victories as it fights the SEC in a case that could redefine how the agency polices digital assets. Grayscale Investments, which plans to launch a Bitcoin fund for the general public, has hired the white-shoe law firm, Davis Polk, to publicly outline a legal case that could be brought against the agency if it obstructs the company’s plans. Terraform Labs’ CEO sued the SEC after it attempted to serve him with a subpoena.

The emerging legal assault, which is being supported by crypto-friendly lawmakers who believe the SEC is exceeding its authority, has the potential to limit the SEC’s reach for years to come and remove what many in the industry see as their biggest regulatory barrier to launching even more virtual currency products.

“As a lawyer, you’re kind of trained and taught to not pick fights with regulators,” Ripple general counsel Stuart Alderoty said in an interview. “But we didn’t pick a fight with a regulator, the regulator picked a fight with us. Respect for regulators needs to be earned, and I don’t think the SEC has earned the right to get the industry’s respect.”

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The impending legal volley is just the latest example of the cryptocurrency industry taking a tough stance with Washington policymakers who threaten the industry’s growth. This year is shaping up to be a watershed moment in the politics and regulations surrounding digital assets, with several federal agencies prioritizing the issue and lawmakers drafting a slew of legislation. Crypto firms are ramping up their lobbying efforts and planning to make millions of dollars in financial contributions in order to secure government allies and undermine their opponents.

“There’s a carrot-and-stick approach,” said Kristin Smith, who leads the Washington-based Blockchain Association, a trade group. “It’s aggressive — more aggressive than perhaps other industries.”

Gensler, a former Goldman Sachs partner who became a progressive darling for his tough approach to Wall Street regulation, has taken a broad view of the SEC’s role in cryptocurrency, claiming that the majority of the products fall under his agency’s jurisdiction. A string of enforcement actions and behind-the-scenes squabbles with startups have enraged the crypto community.

SEC representatives declined to comment for this story.

“Right now, we just don’t have enough investor protection in crypto,” he said in an August speech that set the tone for his approach. “Frankly, at this time, it’s more like the Wild West. … If we don’t address these issues, I worry a lot of people will be hurt.”

The SEC’s legal battle with cryptocurrency began in the final days of the Trump administration, just before Gensler took over as chairman of the agency.

The agency filed a lawsuit against Ripple in December 2020, accusing the company of illegally raising more than $1.3 billion through the sale of the digital currency XRP. According to the SEC, XRP is a security that should be registered with the agency under the “Howey test,” a landmark Supreme Court decision that serves as the legal foundation for defining investment contracts.

Unlike other SEC enforcement actions that are settled, Ripple fought back, and the case is still being heard in federal court. The company claims that XRP is not an investment contract and that the SEC failed to provide “fair notice” that XRP was unregistered security, which is a violation of due process.