How crypto lawyers plan to counterattack the SEC after Grayscale and Ripple court wins

Ever since the collapse of crypto exchange FTX, the top US financial regulator has been on the warpath, suing industry players large and small.

But industry attorneys, tired of playing defence, are planning a counteroffensive.

Amanda Tuminelli, chief legal officer at advocacy group DeFi Education Fund, plans to marshal other crypto advocacy groups and businesses to strike first and take legal action that could, theoretically, force the Feds to provide the “regulatory clarity” the industry has long craved.

Pre-enforcement challenges

Options include challenging the way federal agencies are making rules under the Administrative Procedure Act, an arcane but important law that permits the public to have their say on the fine print.

Other moves entail challenging the rules themselves after they’re finalised, petitioning regulators to make rules favourable to crypto, and filing so-called pre-enforcement challenges, Tuminelli told DL News.

Tuminelli isn’t alone. The lawyer said she has discussed the strategy with the Blockchain Association, the industry’s prime lobbying group in Washington, and other attorneys.

“We’ve been thinking about it for a while,” Marisa Coppel, senior counsel at the Blockchain Association, told DL News.

But the crypto legal community has been emboldened by a recent string of court victories, Coppel said.

In July, Ripple beat the US Securities and Exchange Commission when a court ruled that programmatic sales of the XRP token used on its platform were not securities transactions.

And the following month, Grayscale won a unanimous ruling from a three-judge appellate court that found the SEC erred by denying the asset manager’s application to convert its listed Bitcoin trust into an exchange-traded fund.

‘A settlement is not a victory.’

—  Brad Garlinghouse, CEO of Ripple

Brad Garlinghouse, CEO of Ripple Labs, urged his industry colleagues to take on the government in court instead of agreeing to pay a penalty, as several have.

“[SEC Chair] Gary Gensler goes out and says that they are winning these cases,” he said last week at a crypto conference. He disagrees.

“A settlement is not a victory,” he continued. “You have to stand up to a bully. And I think, when you stand up to them, they’re losing.”

Rules of the Road

Despite the losses, Gensler has stuck to his argument that securities laws already on the books apply to the vast majority of digital assets.

“There is nothing about the crypto asset securities markets that suggests investors and issuers are less deserving of the protections of our securities laws,” Gensler testified Wednesday before the House Financial Services Committee.

The industry begs to differ. It has implored lawmakers and the SEC to, at a minimum, provide regulatory clarity for a novel asset class.

The big hope is that Congress will enact legislation that recognises the special properties of blockchain-based assets and treats them separately from stocks and bonds.

‘Regulation by enforcement is the equivalent of accusing someone of speeding, or ticketing someone for speeding without telling them the speeding limit.’

—  Representative Ritchie Torres

Representative Ritchie Torres, a Democrat from New York and one of the most crypto-friendly lawmakers in Washington, assailed the SEC last week at a conference organised by blockchain research firm Messari.

“Regulation by enforcement is the equivalent of accusing someone of speeding, or ticketing someone for speeding without telling them the speeding limit,” he said.

“You, as an entrepreneur, need to be clear about what the rules require of you in order to comply with them,” he continued. “And Gary Gensler refuses to tell the industry, ‘Here are the rules of the road.’”

Picking ‘good guys’

A well-chosen lawsuit could force the government’s hand, Tuminelli said. But first she needs to find the right plaintiff.

“We want to pick good guys who are trying to comply [with applicable regulations], who are doing everything they can to get regulatory clarity, and are being open and transparent about the way they’re doing it,” she said.

Once that’s been accomplished, there are several tools available to crypto lawyers. But Tuminelli’s preferred strategy is a so-called “pre-enforcement challenge.”

In a pre-enforcement challenge, the plaintiff alleges that a regulator’s history of suing similar companies gives it reason to believe it, too, will find itself in that regulator’s crosshairs.

“We’re seeing companies and projects change their course of action based on fear of SEC enforcement,” Coppel said. “And it’s not fair, given that the SEC has not promulgated any clear rules of the road, and neither has Congress.”

Petitioning the government for rule-making, meanwhile, has some in the industry wary. But Tuminelli believes that, too, is worth a shot.

Counter-offensive

“I think a lot of people are scared to do that, because we’re going to get a rule we don’t like,” she said. “But I think that any regulatory clarity is helpful, and also, if we do get a rule and they finalise it, we can sue over it.”

Given congressional gridlock, a legal counter-offensive may be the industry’s best option at the moment. But it’s an expensive, time-consuming process.

“Congress writing a bill would be the best course,” Coppel said. “When you fight these issues in the courts … you basically have to go all the way up to the Supreme Court for the law to become the law of the land.”

In practical terms, Ripple’s victory in court means little to other firms.

The SEC is weighing an appeal of the ruling in the Ripple case, potentially setting the stage for another courtroom clash in the second quarter of 2024.

Tuminelli said she’s still searching for crypto businesses that may serve as ideal plaintiffs. And if Tuminelli found ideal plaintiffs, recruiting them to a legal crusade is by no means a given. Tuminelli said the firm would have to be willing to draw the ire of the Feds.

“Obviously they have to be willing to poke the bear,” she said, “which not a lot of protocols are willing to do, understandably.”

And buoyed by the courtroom triumphs of the summer, a strategy to counter Gensler’s crackdown is gelling in the crypto legal community. More legal battles seem inevitable.

Have a tip about crypto legal matters? Contact the author at aleks@dlnews.com.