When the SEC decided to initiation its lawsuit against Ripple over its cryptocurrency, XRP, the crypto-world was shocked as it was one of the few times the SEC sued over a cryptocurrency. One of the primary questions presented was whether the XRP coin qualifies as a security, and if so, can the SEC regulate it.
Supreme Court precedent
Regardless of how that decision is answered, under standing Supreme Court precedent, the SEC can only regulate a security if the securitized transaction occurred within the United States. By their very nature, cryptocurrencies, like XRP, are decentralized coins that exist within and outside of the United States, which means that even if XRP is a security, the SEC may not have jurisdiction to regulate it.
Blockchains exists on the internet and cross borders. For example, the XRP coin structure is a consensus voting mechanism, where XRP transactions can be opened and closed anywhere in the world. This means that, if the courts determine that this cryptocurrency fits into the definition of a security, before the SEC can regulate it, they will have to confirm that they have jurisdiction to do so. A question for the Courts will be whether there was sufficient contact and transactions within the United States to confer jurisdiction to the SEC, which may not be entirely possible with XRP or any other cryptocurrency. This is why this litigation may have widespread implications in deciding whether the SEC can regulate the crypto-market.
Settlement could be coming
Regardless of how the judge decides the case, all the parties involved seem to be eyeing a settlement. Even SEC-insiders believe that the Ripple lawsuit was ill-advised, and the XRP community is eager to bring their coins back to market. Some industry insiders believe this could happen as soon as May. If a settlement is reached, without the need for a formal adjudication on the merits, the SEC can “kick the can” down the road on crypto-regulation, and XRP can go back to being a traded cryptocurrency in the United States.
While this type of securities litigation is novel, it is not unprecedented. As the crypto-market expands, at some point, the SEC will have to figure out a regulatory scheme. Until then, piecemeal securities litigation will be the norm in the crypto-space.