Fintechnically Speaking

December 6, 2024December 6, 2024 by Terry R. Weiss

Paul Atkins’ Nomination as SEC Chair Helps to Push Bitcoin Above $100k (for now), But Why…?

Almost immediately after President-Elect Trump posted his announcement of Paul Atkins to replace Gary Gensler as the SEC Chair, the crypto sector, including Bitcoin, rallied, alongside the equity market rally led by the tech sector. Cheers from crypto sector leadership followed. Sure, Chairman Gensler has been no friend of Crypto, begrudgingly approving the trading of Bitcoin-based ETFs and more significantly engaging in rule-making through enforcement. It makes sense then that the expected exit of Chairman Gensler would be applauded, but why Paul Atkins?

SEC Chair nominee Atkins served as an SEC Commissioner with Chairmen Harvey Pitt, Bill Donaldson and Chris Cox, from 2002-2008 and since, has served as the founder and CEO of Patomak Global Partners, consulting for the securities and crypto industries on all manner of topics.

Last February, while in the private sector, SEC Chair nominee Atkins agreed to be interviewed on an outwardly Libertarian podcast. He broadly declared that while the SEC should prosecute illegal activity, like FTX, the agency should also otherwise accommodate innovation to encourage the flow of capital. He stressed that regulators should be “attuned” to opportunities for innovation and “accommodate…reasonably…things that are out there to advance cost savings and innovation.” Specifically, “[t]he SEC should be there with its ear to the ground to figure out which way things are moving and should accommodate activity that’s not criminal and enable markets to flourish because…if it challenges incumbents…and it helps to bring down costs for investors and for people who are trying to raise capital…that’s the reason why we have financial markets and to have capital find its way…to businesses.”[1] This was hardly the regulation through prosecution which was a hallmark of the administration under Chairman Gensler.

While stressing innovation, SEC Chair nominee Atkins was certainly no fan of FTX, SBF or their fraud. But at its core, it was not a problem with crypto: “It happened to happen in the crypto space, but when you peel back the layers it’s the same thing that happened elsewhere, someone without proper controls without proper governance of the corporation uses other peoples’ money to do things without accountability.” Like Madoff decades before, SEC Chair nominee Atkins noted that “[SBF] was not accountable to anyone, there was no board.”

But innovation aside, there is still the fundamental question of whether crypto qualifies as a security and appropriate for SEC regulation. While the SEC under Chairman Gensler and defense counsel fought vigorously over whether crypto did or did not meet the Howey test,[2] a case decided over 60 years before Satoshi Nakamoto first implemented the blockchain, SEC Chair nominee Atkins presented a different view: he noted that the Howey case is “quite old, it’s arguable whether or not it’s still current…I could see the Supreme Court reexamining that for its coherence to the current environment and whether or not it needs to be tweaked.” In the meantime, while the regulatory issues are being resolved, SEC Chair nominee Atkins signaled that the cryptocurrency industry needed certainty in regulation akin to the SEC’s current safe harbor rules for securities offerings: “Safe harbors have done a good job in giving certainty to industry and of course in this particular industry [cryptocurrency] we need certainty, of course there’s a dearth of that now.”[3]

As someone who is committed to promoting innovation and workable regulation, while prosecuting real bad actors, it is no wonder the markets and commentators have applauded the nomination of Paul Atkins so loudly.

[1] See Keep Your Government Hands Off My Crypto | Guest: Paul Atkins | Ep 215 – YouTube.

[2] Sec. and Exch. Comm’n v. W.J. Howey Co., 328 U.S. 293 (1946).

[3] See The Capital ’19: Fireside Chat with Paul Atkins, Former Commissioner, U.S. SEC – YouTube.

December 5, 2024December 5, 2024 by Gregory Bailey

Trump’s Crypto Strategy: A White House Role and the Vision of a Bitcoin Reserve

By Stefanie Wyaco, Matthew A. Catania, and Gregory Bailey.

President-elect Donald Trump’s election victory sparked a renewed interest in integrating cryptocurrency into the U.S. government’s economic strategy. During his campaign, Trump proposed the idea of building a national Bitcoin stockpile and creating a dedicated White House role for cryptocurrency. This role could take several forms, including a single advisor or a larger advisory council, and might even extend to managing a Bitcoin reserve.

A New White House Role

A White House crypto advisor or council would play a pivotal role in shaping the nation’s cryptocurrency policies. This figure would likely collaborate with Congress to draft and pass legislation, with the goal of creating a regulatory framework for cryptocurrency in the U.S. Potentially operating under the National Economic Council, the advisor or council would work in close coordination with regulatory agencies, signaling the administration’s commitment to fostering innovation while addressing current regulatory inefficiencies.

The potential creation of a Bitcoin or crypto reserve would add a new layer of complexity. Managing such a reserve would require deep coordination among the Federal Reserve, Treasury, CFTC, and SEC. While the CFTC and SEC have put forth crypto-related advisory notices and orders appearing to regulate certain activity, the industry still lacks clear consistent guidance despite the SEC taking enforcement actions—all of which is likely to change under the Trump Administration. Whereas the Federal Reserve oversees the country’s monetary policy, supervises and regulates financial institutions, conducts payment and settlement safety and efficiency, and promotes consumer protection. Much like the Federal Reserve, a Bitcoin reserve would serve as a strategic asset, with monetary authorities regulating its use for purposes like consumer protection, financial stability, and enforcing debt policies.

One of the central questions surrounding the creation of a Bitcoin reserve is how to handle exchanges, which play a crucial role in the trading and liquidity of cryptocurrencies. Two types of exchanges are often discussed: centralized and decentralized. Centralized exchanges, operated by a single entity, offer a degree of consumer protection, such as Know Your Customer (KYC) requirements through identity verification and Anti-Money Laundering (AML) requirements through transaction monitoring, suspicious activity reporting, proof of funds requests, and restrictions in certain jurisdictions. These measures help centralized exchanges comply with applicable consumer protection laws and financial reporting obligations, and attract institutional investors, while offering a broad range of supported cryptocurrencies.

Decentralized exchanges, on the other hand, operate on blockchain technology and allow for peer-to-peer trading, and often require purchasing native tokens for the transaction fees. Decentralized exchanges also offer more privacy, including anonymity and minimal data collection due to the lack of KYC requirements, which aligns with Bitcoin’s original purpose. The blockchain technology is supported by secure cryptography encryption, which creates a unique publicly available signature for each transaction such that the subsequent blocks are linked to previous transactions and cannot be modified without modifying the entire chain. This is an efficient method to automate decentralized transactions with smart contracts, reduces middlemen transaction fees, and offers near-instant settlement of funds.

Deciding how the government plans to interact with these types of exchanges and potentially integrate a Bitcoin reserve, whether via an exchange or not, will be pivotal for the crypto space moving forward. A government Bitcoin reserve could serve as a potential stabilizer and exchange, regardless of Bitcoin’s classification status, whether as an asset, commodity, or currency. However, national reserves may trigger global competition for additional reserves that can cause higher demands with less supply. Therefore, a formal role overseeing a reserve, policy implications, and regulations would be a logical step.

What a National Bitcoin Reserve Would Look Like

U.S. Senator Cynthia Lummis of Wyoming has already proposed a plan for building a national Bitcoin reserve, and she intends to revisit it in January 2025. Senator Lummis’ plan envisions the accumulation of one million Bitcoins over the next 20 years, with the goal of positioning the cryptocurrency as a hedge against inflation and as a complement to the U.S. dollar. Senator Lummis’ proposal would convert a portion of the Federal Reserve’s gold certificates into Bitcoin assets.

Proponents of a reserve argue it will reduce the national debt, free up U.S. dollars for other uses, and position Bitcoin as a long-term financial asset. Already, some investors and organizations are moving toward a similar strategy. Tether, for example, a leading stablecoin issuer, has amassed a large reserve of U.S. Treasury bills, indirectly backing Bitcoin and supporting its use as a stable asset. Tether tokens, USDT, are stablecoin assets tied to real-world currencies on a one-to-one basis. Stablecoins are blockchain based currencies that are tied to fiat currencies. Stablecoins are intended to reduce volatility for traders and businesses, especially crypto exchanges, wallets, and payment processors. Tether, or the like, could indirectly support a Bitcoin reserve by providing stable dollar-backed liquidity and foster Bitcoin-backed lending.

Challenges Ahead: Congressional Approval and Public Skepticism

While the momentum for a national Bitcoin reserve is growing, the path to implementation will face significant hurdles, particularly when it comes to securing Congressional approval. Lawmakers will need to address concerns around inflation, economic volatility, and the broader implications of such a reserve on the U.S. financial system. Public skepticism about cryptocurrency, combined with regulatory uncertainty, and active litigation may slow progress, despite the seemingly crypto-friendly administration.

Nevertheless, the increasing institutional and governmental interest in cryptocurrencies world-wide suggests that the conversation around Bitcoin as a strategic asset will only intensify. How the new administration navigates these discussions, and whether Congress shares the same enthusiasm, will shape the future the global crypto market and the United States’ role in it.

December 3, 2024December 4, 2024 by Duane Morris

The Growth of RWA Tokenization

By Joseph E. Silvia and Carolina Goncalves

The tokenization of real-world assets (RWAs) is a growing industry that, as of September 2024, was valued at approximately $118.6 billion. RWA tokenization is projected to become a trillion-dollar global industry by 2030, thanks to the development of infrastructure to facilitate the ownership, exchange and transfer of RWA tokens by some of the largest global financial institutions.

What is asset tokenization?

Asset tokenization is the transformation of physical assets, like real estate, art, bonds, money market funds (MMFs) and stocks, into digital tokens that can be bought, held or traded on a blockchain. The tokens represent ownership or a fractional share in an asset, which facilitates its exchange or transfer. Unlike cryptocurrency, tokenized assets have underlying value that is not necessarily driven by market demand, utility and speculation.

Asset tokenization, together with smart contracts, automate processes and increase transparency and security in the ownership and trade of assets. Smart contracts on the blockchain manage asset ownership and transaction details, such as divisibility and transfer restrictions. Additionally, asset tokenization and smart contracts may improve liquidity, transparency, availability, accuracy, programmability and reduce fraud through blockchain technology.

How does RWA tokenization work?

By way of example, the tokenization of a piece of artwork introduces the ability to invest in the artwork and own a fractional share, rather than purchasing the entire asset. If the artwork is priced at $10,000, for example, asset tokenization allows an investor to purchase the asset in fractions (e.g., 1000 fractional assets of $10 each).

Once the owner’s rights over the artwork are verified, the artwork would be transferred to a blockchain-based platform that supports tokenization, and the asset’s value would be assessed and finalized. The artwork would then be divided into tokens that can be purchased and traded by investors pursuant to the applicable smart contracts.

The future of RWA tokenization

RWA tokenization similarly applies to financial products like MMFs. Major financial institutions like Visa, JPMorgan and Deutsche Bank are implementing platforms for the tokenization of different RWAs, including MMFs. For example, in October 2023, JPMorgan announced its Tokenized Collateral Network (TCN), which is a live product that allows investors to tokenize their MMF shares and collateralize them.

Deutsche Bank announced in May 2024 that it joined the Monetary Authority of Singapore’s Project Guardian, a collaborative initiative involving global policymakers from different countries like the UK and Switzerland, to test a blockchain platform to service tokenized and digital funds.

On October 3, 2024, Visa launched a Visa Tokenized Asset Platform (VTAP). VTAP, which is currently in sandbox mode, allows for the issuance and management of various fiat-backed digital assets like stablecoins, deposits and central bank digital currencies (CBDCs), and will cater to banks by offering a comprehensive infrastructure for securely minting, transferring and settling digital assets across public and permissioned blockchains.

Of course, there are potential challenges like regulatory uncertainty and smart contract vulnerabilities. That said, the increasing prevalence of RWA tokenization among investors and financial institutions in the U.S. and abroad will likely push for more certainty and stability in the industry, further driving its growth.

November 19, 2024November 19, 2024 by Duane Morris

Bitcoin ETF Launch Expands Trading Opportunities

On November 19, the Options Clearing Corporation (OCC) and Nasdaq launched Bitcoin ETF options—starting with BlackRock’s iShares Bitcoin Trust (IBIT)―signaling a new era of cryptocurrency financial instruments. The launch of Bitcoin ETF options in the United States marks a new moment for cryptocurrency markets. Options promise to transform how institutional and retail investors engage with Bitcoin.

November 14, 2024 by Duane Morris

Impact of the Presidential Election on the Future of Digital Assets in the United States

By Vincent J. Nolan III

During his first term in office, President Trump expressed skepticism about cryptocurrencies, saying that he was “not a fan” and that they were based on “thin air.” However, statements made during the campaign leading to his election on November 5, as well as his family’s involvement in the crypto space, indicate that the new Trump administration now holds a favorable stance toward the industry. The post-election rally in cryptocurrency markets certainly indicates that the industry believes that the incoming Trump administration will be pro-crypto.

In this post, we will explore what the future of cryptocurrency might look like under a Trump-led government, how regulatory changes could unfold, and the potential timeline for meaningful reform.

1. A Pro-Crypto Administration

Based on his campaign rhetoric and the Trump family’s increasing involvement in crypto, it appears that President Trump will be a more crypto-friendly president than his predecessor. For example, his policy proposals have included the following:

Aggressively encouraging Bitcoin mining by having – in his words — “all the remaining Bitcoin to be MADE IN THE USA;”
Creating a strategic Bitcoin reserve to eliminate the $35-plus trillion U.S. debt;
Preventing the creation of a central bank digital currency; and
Eliminating oppressive regulation in the crypto space by, in part, firing U.S. Securities and Exchange Commission Chair Gary Gensler “on day one.”

While not all campaign promises become reality, it is likely that the new Trump administration will take an aggressively supportive stance toward cryptocurrency.

2. The SEC Under Fire

On the campaign trail, President-elect Trump pledged to the industry that he will fire SEC Chair Gary Gensler “on day one.” We would expect that Trump will attempt to carry out this promise immediately.

Under Gensler, the SEC has classified many digital assets as securities and, as a result, brought and litigated multiple cases against major crypto exchanges, projects and developers for allegedly selling unregistered securities and other alleged violations. This has led to tension with the crypto industry, with complaints that the SEC is regulating the industry through enforcement, that the regulatory environment is not clear, and that these efforts have impeded innovation and development of the crypto economy.

Whether President Trump can actually or effectively fire Gensler immediately remains to be seen. Gensler’s term currently runs through June 5, 2026, and, having been appointed and confirmed by the Senate, he can only be fired for cause. But as p.resident in his first term, Trump demonstrated that he did not want to be bound by the niceties of the federal appointment process and would creatively work to achieve his ends.

3. Congressional Movement Towards Crypto-Friendly Legislation

The U.S. crypto industry has been pushing hard for regulatory clarity. While the executive branch can take significant steps to shape policy, legislative action will be crucial for ensuring the long-term stability and growth of the crypto industry.

During his presidential campaign, President Trump declared that he will be a pro-crypto president. But it is important to recognize that the crypto industry’s political efforts were not limited to the presidential race and, as a result, over 250 (self-proclaimed) “pro-crypto” candidates were elected to Congress.

Under a Trump-led government, we would expect to see a concerted effort from both the administration and Congress to pass legislation that recognizes cryptocurrency as a legitimate asset class and establishes clear rules for its use and taxation, building upon prior efforts such as the passage of the Financial Innovation and Technology for the 21st Century Act in May 2024 by the House. By highlighting the economic potential of crypto and the need for the U.S. to remain competitive in the global digital economy, the Trump administration could leverage the first truly pro-crypto Congress to pass crypto-friendly legislation that clarifies the legal framework for digital assets.

4. A 12-18 Month Timeline for Crypto Legitimization

Regardless of what happens with the SEC chair, if the Trump administration successfully drives legislative action, we could see significant changes within the next 12 to 18 months.

New legislation that brings regulatory clarity could create new opportunities in the following ways:

Open the door for traditional financial institutions, including banks and large investment firms, to participate more actively in the crypto space. These institutions have largely been sidelined due to regulatory uncertainty and the risk of non-compliance with existing laws. Once a clear legal framework is established, these institutions would have more incentive to offer crypto-related products and services, such as custody, trading, and even crypto-based financial products;
Retail investors could benefit from greater legitimacy and protections within the crypto market;
It could lead to a surge in retail adoption, further driving the price and mainstream acceptance of digital assets; and
Losses in crypto and blockchain development to Asian markets could be reversed and the U.S. could again become a haven for innovation in the crypto space.

Conclusion: Crypto’s Bright Future in a Trump Administration

In summary, a second term for Donald Trump could be a game-changer for the cryptocurrency industry in the U.S. With a pro-crypto stance, potential changes at the SEC, and the push for favorable legislation, the next 12 to 18 months could see crypto move from a fringe asset class to a mainstream financial tool. The Trump administration’s focus on deregulation and fostering innovation, combined with pressure from industry stakeholders and the broader financial sector, could help pave the way for a more robust and legitimate cryptocurrency market in the U.S.

November 1, 2024December 4, 2024 by Duane Morris

Crypto.com Acquires Broker-Dealer While Suing the SEC

By Terry Weiss and Alek Smolij

Crypto.com, one of the world’s largest cryptocurrency trading platforms which claims to have over 100 million users, announced this week an acquisition of Watchdog Capital, LLC, an SEC-registered broker dealer with the capability to trade traditional securities. The move is significant because while there has been a deliberate expansion into crypto by some traditional securities firms (whether it be allowing the trading of crypto ETFs or direct ownership in more limited cases), this move is interesting for another reason: on one hand Crypto.com will expect to need the regulatory support from the SEC as it undertakes this expansion, but at the same time it is suing the SEC, contending that the regulator has overstepped its authority in the crypto space.

October 30, 2024October 30, 2024 by Duane Morris

California Requires Digital Storefronts to Avoid “Sales” Terms and Provide License Terms

A new California law, AB 2426, signed by Governor Gavin Newsome on September 24, 2024, requires any company offering online-only digital goods to California consumers using “buy,” “purchase” or similar terms to clarify whether or not the goods are a transfer of ownership or are instead a license to the purchaser.

In essence, the law bans digital storefronts from using terms like “buy” or “purchase” if there is no transfer of ownership unless they also inform customers that they are not getting unrestricted access to the digital items they are paying for. Online sites using “buy,” purchase” or similar terms when offering digital goods will have to prominently state that customers are getting a license that can be revoked and provide the terms of the license. Companies that do not could be fined for false advertising or potentially sued by consumers.

Read the full story on the Duane Morris LLP website.

October 8, 2024December 4, 2024 by Duane Morris

Swift Pilots Live Digital Asset Transactions Beginning in 2025

By Joe Silvia

On October 3, 2024, the Society for Worldwide Interbank Financial Telecommunication (“SWIFT”), the global bank messaging network, announced plans to allow global financial institutions the ability to use its platform to conduct pilot transactions for the settlement of digital assets and currencies starting in 2025. This announcement is just the latest advancement for the digital assets ecosystem as it moves the settlement of digital assets and currencies from Swift experimentation to live transactions.

Swift indicated that “these trials will demonstrate how financial institutions can transact interchangeably across both existing and emerging asset and currency types using their current Swift connection” and the “trials aim to address a key challenge in the continuously evolving digital asset market: the rise of disconnected digital platforms, or ‘digital islands’, that could hinder more widespread adoption and ease of use for new forms of value.” Swift notes that its ultimate vision in this space is to give financial institutions a single point of access to multiple digital asset classes and currencies, and this move to pilot transactions “marks an important milestone” toward that ultimate vision.

While the announcement reflects the continued interest and demand for further integration of digital assets in the global financial system, we anticipate continued sluggish progress to that end given the broad range of stakeholder perspectives.

August 28, 2024December 4, 2024 by Duane Morris

Hong Kong Continues to Promote a Pro-Crypto Stance with a New Enhanced Regulatory Framework

By Mauro Wolfe and Carolina Goncalves

In the game of which jurisdiction will become the crypto global king, Hong Kong is the latest aspiring fintech hub to announce enhancements to its digital asset regulation framework. No doubt this change is designed to give Hong Kong an edge in the global crypto markets.

In July 2024, the Hong Kong Monetary Authority (HKMA) announced its plans to enhance its digital asset regulatory framework by introducing legislation related to stablecoins, a type of cryptocurrency tied to stable assets like fiat currencies, within the following 18 months. The HKMA is carrying out sandbox testing and plans to introduce stablecoins by the end of 2024.

HKMA launched the sandbox in March 2024 as “part of the HKMA’s efforts in facilitating the sustainable and responsible development of stablecoin ecosystem in Hong Kong.” The sandbox participants are required to “propose concrete use cases for the stablecoin to help address pain points in economic activities and create value and new opportunities for [Hong Kong’s] economy and financial services.” The use cases will involve supply chain management, applications in capital markets and digital asset trading, including cross-border trade payments. The sandbox participants will then provide their use case feedback to regulators who will use the data to formulate a “fit-for-purpose and risk-based regulatory regime.” Where the use case involves cross-border payments, the sandbox participants must ensure that both they and their overseas partners strictly comply with the legal and regulatory requirements of the applicable jurisdictions, in addition to ensuring that their stablecoin issuance process complies with the sandbox requirements and Hong Kong laws. The participants will be prohibited from soliciting or handling funds from the public for sandbox activities.

On July 18, 2024, the HKMA announced the first participants in its stablecoin issuer sandbox. They include a company linked to significant Chinese e-commerce retailer Jingdong Coinlink Technology; RD InnoTech Limited, a local fintech firm; and a coalition of Standard Chartered Bank, venture capital firm Animoca Brands and Hong Kong Telecommunications. The sandbox participants will undergo an assessment process as they test their respective stablecoin operational plans within a limited scope and in a risk-controlled environment specified by the HKMA. The HKMA will announce on its website any future participants as it continues to process sandbox applications.

These developments follow a two-month public consultation period that received 108 stakeholder submissions, including from market participants, industry associations and professional organizations. The consensus was that a regulatory regime is necessary for stablecoin issuers to both manage potential monetary and financial stability risks and also ensure transparent and effective oversight.

Hong Kong’s enhanced regulatory framework is aligned with developments in international standards and practices, such as the expectations of the G20’s Financial Stability Board, in the virtual asset ecosystem, including the issuance of stablecoin. The new framework is intended to (1) complement existing regulatory measures for virtual asset trading platforms, (2) make digital asset transactions more secure through regulatory oversight and enforcement, (3) encourage more innovative financial products in Hong Kong, (4) foster innovation and (5) attract global fintech talent.

A central feature of cryptocurrency is the development of borderless commerce. Regardless of which jurisdiction becomes the global crypto king, the cross-border nature of crypto business development is here to stay. Duane Morris will continue to monitor the global legislative landscape as the digital asset continues to mature.

August 14, 2024December 4, 2024 by Duane Morris

District Judge Imposes $125 million fine on Ripple Labs, Demanding No Future Securities Law Infringements after 3-plus year battle with SEC

By Mauro Wolfe

In the ongoing legal saga between Ripple Labs Inc. and the SEC, U.S. District Judge Analisa Torres of the Southern District of New York imposed a $125 million fine on Ripple Labs, a provider of digital asset infrastructure for financial services, and restrained the company from violating U.S. securities laws in the future.

The SEC v. Ripple Labs case is a significant precedent in the cryptocurrency and commercial finance legal communities. The dispute centered around whether Ripple’s sale of XRP – a cryptocurrency developed, issued and partially managed by Ripple – constituted an unregistered securities offering. The SEC contended that XRP should be classified as a security, and therefore Ripple should have registered its transactions with the SEC. However, Ripple argued that XRP is a digital currency and not a security, asserting that the SEC’s application of securities laws to XRP was inappropriate and harmful to innovation in the cryptocurrency space.

On December 22, 2020, the SEC filed an action against Ripple and two of its executives for allegedly using an unregistered digital asset security to raise funds. The SEC charged the defendants with violating the registration provisions of the Securities Act of 1933, seeking injunctive relief, disgorgement with prejudgment interest and civil penalties.

The SEC’s lawsuit stated that Ripple and the two executives started raising funds in 2013 by selling XRP digital assets to investors in the United States and other countries in an unregistered, ongoing digital asset securities offering. The term “unregistered” is key to the SEC’s allegations because the agency’s argument centered around the nature of XRP as digital asset securities and not as a simple cryptocurrency. Additionally, Ripple allegedly gave out billions of XRP in exchange for activities like market-making and labor, contrary to a monetary compensation. In consequence, the complaint alleged that the defendants violated the federal securities laws’ registration requirements by not registering or not meeting any of the exemptions to register these kind of transactions.

Ripple disagreed, arguing that it was not adequately notified of its purported violations of registration regulations. Reluctant to categorize XRP as a security, Ripple defiantly challenged the SEC in federal court. Ultimately, the court was not persuaded with this argument entirely.

In Judge Torres’ decision on July 13, 2023, the court held that XRP “is not in and of itself ‘a contract, transaction, or scheme’ that embodies the Howey requirements of an investment contract.” Ultimately, the court found that Ripple violated the securities laws in its transactions aimed to offer XRP to institutional buyers such as hedge funds. As we have written in other blog posts, the court held that the secondary market transactions were not securities. Other courts have not followed Judge Torres’ analysis as to secondary markets. The disagreement between trial level courts in various cases leaves ultimate resolution on the application of the Howey test to cryptocurrencies to the federal appellate courts and most likely the U.S. Supreme Court, unless congressional legislation arrives first.

Following the summary judgment order from a year ago, the District Court issued the final judgment on August 7, 2024, after nearly four years of litigation. The court’s summary judgment found that some of Ripple’s transactions involving the exchange or sale of XRP were not considered in violation of the securities laws. However, the court held that XRP tokens sold to institutional investors were in violation of Howey, and awarded the SEC with $125 million civil monetary penalty and issued an injunction barring the company from future violations of Section 5 of the Securities Act.

This decision highlights the ongoing challenges that crypto markets face with regard to U.S. law and regulation. In effect, law and regulation lag behind the pace of industry.

The murky U.S. legal and regulatory landscape makes for challenges for the crypto markets and its participants. While other foreign countries are developing new laws and regulations, the sector waits for the creation of the U.S. crypto framework.

Once that happens, the United States may yet have a chance to be the leading crypto market in the world.

Special thanks to law clerk Laila Salame Khouri for her assistance with this blog post.