Stone Bridge Ventures Senior Account Manager Alex Markovic expects that the verdict in the case of SEC v. Ripple can have a major impact on future crypto regulation in Canada. A few weeks ago, the US District Court for the Southern District of New York made a landmark decision for the case. Considering how it has been going on for months and has had the crypto community in a chokehold, the global financial community was eagerly awaiting the result.
Court Rejects SEC’s Position
The verdict is that Ripple Labs’ flagship token, XRP, isn’t a security, rejecting the position taken by the SEC. When filing a lawsuit, the SEC stated that if a crypto asset was initially distributed using an investment contract that’s subject to securities laws, it should be subject to the same laws in subsequent transactions.
As of yet, the court’s decision isn’t a binding precedent in other US states or in Canada, and it’s likely that the SEC will appeal it. Considering how much traction this decision has garnered, it could have implications for crypto regulations in Canada.
During the case, there were questions as to whether trading XRP in the secondary market would be the same as trading securities. In response to this, the District Court stated that it would entirely depend on the economic reality of that specific transaction and the circumstances surrounding the exchange. These factors can impact whether the sale of XRP in a secondary market can be classified as an offer of an investment contract.
This is a stark contrast to what Gary Gensler, chair of the SEC, has stated – that most tokens qualify as securities. It’s also the basis for the SEC’s latest complaint against crypto exchange, Coinbase and other US-based issuers.
Ripple Decisions Could Have Implications for Future CSA Regulations
The CSA is one of the first regulators to impose capital markets regulation on market intermediaries for crypto assets. For this, the CSA stated that the contract between a crypto trading platform, also known as a CTP, and a client is also a derivative – a crypto contract. This also applies if the underlying asset isn’t a security. Applying securities regulation to cryptocurrency assets in Canada has had a positive effect by addressing the issues associated with CTP activities.
Nevertheless, the current SEC v. Ripple decision shows major differences between securities and cryptocurrencies. It shows why evolving regulation should look at the investment and consumptive uses of cryptocurrencies. For instance, the CSA has taken a regulatory approach towards stablecoins, but they should recognize that these assets are often used as a store of value or payment method rather than an investment tool.
The recent Ripple decision gives Canada’s crypto holders a reason to argue that secondary market sales of tokens received through exempt securities transactions shouldn’t be regulated the same way as the distribution of securities.
Alex Markovic of Stone Bridge Ventures predicts that the CSA will continue to improve its regulatory system for CTPs. But the recent decision shows that the current regulatory framework for securities is sometimes rigid and doesn’t always apply to cryptocurrencies.