Coinbase and Ripple CLOs Challenge SEC’s ‘Crypto Asset Security’ Terminology

• Crypto industry leaders are challenging the SEC’s recently coined terminology of “crypto asset security.”
• Legal experts argue that this term is not grounded in established U.S. law or regulative frameworks.
• Key figures from Coinbase and Ripple have publicly criticized the SEC’s inconsistent treatment of digital assets.

Discover the latest challenges facing the SEC as top legal officers from Coinbase and Ripple contest its terminology and approach towards crypto regulation.

Coinbase CLO Disputes SEC’s “Crypto Asset Security” Term

Paul Grewal, Coinbase’s Chief Legal Officer, recently took to social media to voice his concerns regarding the SEC’s term “crypto asset security.” He highlighted the lack of legal foundation and the SEC’s inconsistent application of the term in various enforcement actions. According to Grewal, the SEC’s labeling of tokens as securities lacks a uniform standard and contravenes previous statements made to federal courts, creating a regulatory gray area that confuses both industry participants and legal authorities.

Inconsistencies in SEC’s Approach

Grewal’s criticism aligns with earlier sentiments from lawmakers like Rep. Ritchie Torres of New York, who had questioned the SEC’s terminological accuracy during a congressional hearing. Notably, the term “crypto asset security” does not appear in any existing U.S. law, regulation, or Supreme Court ruling. Other legal scholars, such as Robinhood’s CLO Daniel Gallagher, have echoed these concerns, asserting that the SEC’s use of the term lacks statutory support and is arbitrarily applied, further complicating the legal landscape for digital assets.

Ripple’s Legal Chief Joins the Critique

Stuart Alderoty, Chief Legal Officer at Ripple, has echoed similar criticisms towards the SEC’s terminology. According to Alderoty, the use of “crypto asset security” has led to confusion in court proceedings, effectively undermining the SEC’s credibility. This scrutiny intensified following an SEC apology for using the term in its complaint against Binance, acknowledging its inappropriate application. Ripple’s ongoing legal battle with the SEC over the status of XRP exemplifies the regulatory inconsistency, with Alderoty arguing that these terminological disputes damage the SEC’s persuasive power in court.

SEC’s Credibility Under Fire

The credibility crisis within the SEC is further spotlighted by Alderoty’s statement that the agency’s fluctuating definitions contribute to legal uncertainty for blockchain companies. This critique is particularly relevant as Ripple continues its protracted litigation with the SEC. Alderoty believes that such inconsistencies make it difficult for the SEC to establish a convincing case in court, thereby hampering the overall regulatory clarity needed for the industry.

SEC Under Scrutiny Ahead of Congressional Testimony

Next week, all five SEC Commissioners, including Chair Gary Gensler, will appear before the House Financial Services Committee. This event marks the first full commission testimony since 2019 and comes at a politically charged moment. Legislators and industry stakeholders have increasingly voiced their concerns about the SEC’s approach towards blockchain innovations. House Majority Whip Tom Emmer and Chairman Patrick McHenry, among others, have argued that the SEC’s regulatory stance towards digital assets and crypto airdrops is stymying innovation and does not fit well with the decentralized nature of blockchain technology.

Growing Criticism and Internal Investigations

Amidst this contentious backdrop, SEC Chair Gary Gensler is also contending with allegations of illegal hiring practices within the agency. These internal issues are likely to be raised during the upcoming hearings, complicating his defense of the SEC’s regulatory actions toward the burgeoning digital asset sector. The call for a more adaptable and clear regulatory framework is gaining momentum, with prominent industry leaders and lawmakers urging the SEC to refine its approach in a manner that fosters rather than hinders blockchain advancements.

Conclusion

As the SEC faces mounting criticism from legal experts and industry leaders, the upcoming congressional hearings will be pivotal. Both Coinbase and Ripple have highlighted the need for regulatory clarity and consistency, challenging the SEC’s current stance on digital asset terminology. The outcome of these hearings could significantly influence the future regulatory landscape for cryptocurrencies, blockchain innovation, and digital assets. Stakeholders are keenly watching for the SEC to provide a more transparent and consistent regulatory framework that will help bolster the blockchain ecosystem while safeguarding investor interests.