Author: Eterna Capital Compiler: Vernacular Blockchain
Recent news that the SEC has issued a Wells Notice (a prelude to formal charges) to the popular NFT market OpenSea has added a new chapter to the legal saga that has plagued the blockchain industry for years.
As we all know, the SEC's historical position is that "everything except Bitcoin is a security" - including, according to the notice to OpenSea, including NFTs. The debate over whether crypto assets are securities or commodities is crucial: it determines whether the SEC or the CTFC is responsible for regulation. In essence, this is a judicial exercise in understanding what can be considered a "security" as defined in 1946: therefore, it is difficult to apply to modern technologies such as cryptocurrencies. The resulting uncertainty and regulatory incoherence have been the main ceiling for the growth of the crypto industry, as it has reduced adoption rates, R&D rates, financing rates, etc.
Careful investors have noticed that recent judicial developments indicate that the U.S. Securities and Exchange Commission (SEC) has failed to convince the court - and its chances of success by seeking further litigation are waning.
1. SEC v. CONSENSYS
1) After ETH 2.0
In June 2024, the U.S. Securities and Exchange Commission (SEC) abandoned its investigation into Consensys' Ethereum 2.0 (the blockchain's transition to proof of stake). According to Consensys' own statement, "this means that the SEC will not bring charges on the grounds that ETH sales are securities transactions." This is certainly good news -
But astute observers prefer to wait for the SEC to announce the results of its investigation into Consensys' ETH 2.0 transactions and Ripple.
Today, our optimism on these fronts is also justified.
2) Before ETH 2.0
Before Ethereum transitions to proof-of-stake (i.e., the proof-of-work era), the SEC may still investigate Consensys' Ethereum transactions. For investors, what is worrying may not be the lawsuit itself, but the content of the lawsuit: the SEC's lawsuit against Consensys's proof-of-work activities may contain details that worry ETH investors, namely whether these details can be considered securities.
Fortunately, such a lawsuit is increasingly unlikely to happen for two reasons:
Cryptocurrency has become a polarized, politicized topic that neither presidential candidate will take lightly;
The approval of a spot Ethereum ETF can be seen as the final conclusion of the "securities vs. commodities" debate.
2. SEC v. RIPPLE
1) Subtle ruling
In August 2024, Judge Torres issued a landmark ruling that Ripple's sale of its Token (XRP) to institutional investors constituted an unregistered securities offering. While this resulted in a $125 million civil penalty, the ruling was seen as a success given that the fine was less than the $2.5 billion the SEC had sought.
In addition, the court ruled that secondary sales of XRP on trading platforms were not securities transactions, which was seen as a victory for Ripple and all cryptocurrencies.
However, it was a Pythagorean victory: Judge Torres’ ruling recognized that XRP could be considered a security in certain circumstances — but it was not a uniform security across all transactions. This highlights the complexity of applying traditional (i.e., “unreformed”) securities laws to cryptocurrencies and allows the SEC to take action in different cases.
2) Legal implications
Is the case over? Probably not. Both parties have until October 6 to appeal. Ripple may pocket the “win” and not appeal. Instead, the SEC will likely appeal (and, in fact, it attempted to do so before the trial concluded, in August 2023—unsurprisingly, Judge Torres dismissed the appeal). While it’s likely that the Court of Appeal will uphold Judge Torres’ unorthodox ruling, there’s no guarantee that it will.
Binding Precedent? Contrary to what the media often misrepresents, it’s important to note that this ruling is not binding (unless approved by the Court of Appeal). On the other hand, it’s also important to note that the momentum is clearly positive: indeed, other judges have cited SEC v Ripple in other cases (e.g., the Ripple ruling was cited in SEC v BN in favor of the defendant in a case involving the BNB Token, in July 2024).
What about other altcoins? Even if the Ripple case ends with a binding precedent, it will still leave most other altcoins affected: in fact, XRP is an exception, having never conducted an ICO and its consensus is not based on proof of stake.
3. SEC’s strategic shift
The Consensys and Ripple cases can be seen as a significant challenge to the SEC’s enforcement strategy, particularly in its approach to seeking broad penalties and enforcing compliance in the cryptocurrency space.
1) Political support
Both cases occurred against the backdrop of increasing political scrutiny of the SEC’s regulatory stance on cryptocurrencies. Experts often overlook the fact that the SEC is an independent regulator that is supposedly free from political influence. Nonetheless, driven by the election, we saw an unusually bipartisan push in Congress to limit the SEC’s power and provide clearer regulatory guidelines.
Even prominent Democrats like Pelosi and Schumer have parted ways with the Biden administration, supporting legislation to bring regulatory clarity to the cryptocurrency industry and reduce the SEC's broad enforcement discretion. Meanwhile, Trump has criticized the current administration's handling of the SEC and even hinted at firing Gary Gensler if re-elected — even though the U.S. president does not have the power to fire the SEC chairman.
2) A series of legal setbacks
The SEC's regulatory actions in the cryptocurrency space have faced significant legal challenges. In fact, shortly after the Consensys and Ripple cases, an appeals court ruled that the SEC's rejection of Grayscale's spot Bitcoin ETF application was "arbitrary and capricious," raising questions about the agency's decision-making process. The SEC is facing public scrutiny after it dropped charges against a Ripple co-founder. Weeks later, a Utah court reprimanded it for "gross abuse of power" in a case involving another cryptocurrency project. The SEC appears to have faced similar challenges in its case against Coinbase.
These events, coupled with the SEC’s eventual, reluctant approval of BTC and ETH spot ETFs, indicate a shift in the SEC’s approach.
4. Conclusion: Turning Point?
The Consensys and Ripple cases are far from decisive victories, but they mark a turning point in the battle between the SEC and cryptocurrencies. They highlight the need for clear legislation to lay the foundation for case law to develop: given the nascent stage of the industry, reliance on case-by-case court decisions will hinder the long-term development of cryptocurrencies.
While the SEC may consider an appeal and other cases continue to proceed, the emerging trend favors the technology. This is a result of judicial developments, the politicization of the topic, and the undisputed success (not just financial) of spot ETFs.
Against this backdrop, one could chalk it up to “dead air” even if the SEC subsequently issues notice and lawsuits against OpenSea. Uncertainty is the only constant regardless of the outcome of the November election, but institutional investors can now reasonably expect the judicial developments contemplated here to finally deliver the regulatory clarity they have been waiting for for years.
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