Grayscale, Ripple lawsuits show crypto’s litigious side

When in doubt, sue their pants off

When the SEC shot down Grayscale’s pitch for a bitcoin spot ETF, the crypto investment firm could have given it another try by filing a new proposal. But Grayscale was bent on going to court, the company signaled. And it’s not the only company to adopt an aggressive legal posture against a regulator.

Litigation has emerged as an important tool for crypto. Grayscale’s disputes bubbling up shows how important the courts have become for settling issues with regulators like the SEC.

• Grayscale CEO Michael Sonnenshein had talked about his company’s plans to lawyer up weeks before the SEC’s decision. The company hired prominent Washington attorney Donald Verrilli to prepare for a legal battle.
• There is a long history of the courts shaping how financial rules are interpreted. The Howey Test that the SEC still uses to determine whether an asset is a security is derived from a 1946 Supreme Court decision about orange groves.
• Victory is never assured, but the courts can offer an outlet for well-funded crypto companies to flex their resources. “If you have enough money to file or defend enough lawsuits, you can more easily wear down your opposition, even if they are a major regulator,” said Mark Hays, a senior policy analyst on fintech at Americans for Financial Reform, a group that has advocated for stronger consumer protections in crypto regulation.

The crypto industry is eyeing a fresh legal opening. A Supreme Court decision limiting the ability of the EPA to draft regulations related to climate change could have wide-reaching implications for all federal agencies.

• The ruling “challenges the regulation by enforcement approach that the digital asset industry has been forced to navigate,” Perianne Boring, founder and CEO of the Chamber of Digital Commerce, a major crypto lobby group, said in a tweet the day the decision came out.
• It’s not clear how the EPA decision will affect crypto cases. Todd Phillips, director of financial regulation and corporate governance at the Center for American Progress, pointed out that the Supreme Court’s ruling is focused on the authority agencies have to address major questions not directly assigned by Congress. The SEC has long regulated securities, and has taken the position that many crypto assets are securities, “so it is not like the SEC is trying to address a problem it has never addressed before,” he said.

Another closely watched legal brawl is the SEC suit against Ripple. In that case, the regulator accused the crypto company of failing to register $1.4 billion of XRP as securities. The lawsuit, which was filed in 2020, was damaging to Ripple, causing the value of XRP to fall dramatically.

• But the legal battle is now seen as a potential turning point for crypto. If Ripple wins, it could weaken the SEC’s argument that most cryptocurrencies should be registered as securities. “That could open the door for other other tokens out there being deemed not to be a security,” said Marc Fagel, a former regional director for the SEC. “It could shrink the SEC’s jurisdiction.”
• But litigation can also be risky for crypto companies. Cathy Yoon, chief legal officer at MPCH, cited the costs of pursuing legal action if a case drags on. “In the end, even though you’ve won, you might not be able to continue” in business, she said.

Katherine Dowling, chief compliance officer and general counsel at Bitwise, said litigation can be “an avenue” for a crypto company, but not necessarily the most efficient one. Court rulings are typically based on the facts of a specific case, which can limit their application. Legislation and clearer regulations, drafted in consultation with the industry, are still the preferred path, she said.

— Benjamin Pimentel (email | twitter) and Ryan Deffenbaugh (email | twitter)

A version of this story first appeared on Protocol.com. Read it here.