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Ruth Kise 13 Oct 2023 ◦ 7 min read

What's next for the SEC Crypto Battle?

What's next for the SEC Crypto Battle?

As you know, the threat of a shutdown looms over the United States. The government shutdown could come as Congress is likely to fall short of agreeing on a budget for the new fiscal year. While the shutdown lasts, uncritical institutions and agencies are closed, and hundreds of thousands of their employees leave for unpaid vacation.

On October 1, in the last hours before the possible closure, US President Joe Biden signed a bill approved and submitted by Congress for temporary funding of the government for 45 days. But despite this, it is not known whether the Congress will have time to reach an agreement during this period. For the parties, the shutdown can be beneficial, but we are more interested in how this situation is reflected in the work of the regulatory bodies, whose actions are now closely monitored by the crypto community.

How much longer to wait for SEC decisions?

The indecisive SEC seems to have slowed further. According to Bloomberg stock analyst James Seyffart, this is directly due to the expected shutdown.

The US Securities and Exchange Commission (SEC) has postponed the decision on several applications for spot Bitcoin ETFs from ARK Invest and 21Shares until January 10, 2024.

“The SEC considers it appropriate to set a longer period for issuing orders to approve or reject applications so that it has sufficient time to review the documents,” the regulator stressed.

The agency also postponed the decision on the exchange fund from the Global X Bitcoin Trust until November 21, 2023.

On July 14, the SEC accepted applications from BlackRock, VanEck, Fidelity Investments, Invesco, and WisdomTree, Bitwise, and Valkyrie for consideration. Franklin Templeton joined them later. Companies expected to hear the regulator's response by October 16-19, but the new date is set for mid-January 2024.

Seyffart also believes the application decision from Fidelity, VanEck, and WidsomTree will be moved as well.

So far, the regulator has not given a single approval for the launch of spot ETFs for digital gold. The Commission made an exception for such products based on futures for the first cryptocurrency from ProShares and Valkyrie Investments.

On August 31, the department postponed the decision on applications until at least mid-October. The SEC decision caused the collapse of the Bitcoin exchange rate below $26,000.

Disaffection of legislative staff 

Shortly before the SEC decision was postponed, a group of four members of the US Congress appealed to Commission Chairman Gary Gensler with a demand to “immediately” approve the spot Bitcoin ETF.

The representatives Mike Flood, Wiley Nickel, Tom Emmer, and Ritchie Torres believe the regulator is “discriminating against spot bitcoin exchange-traded products,” citing legal precedent with Grayscale Investments.

In their opinion, “there is no reason to continue to deny” applications for exchange-traded funds after a court decision, which called the SEC's arguments “arbitrary and capricious” in connection with already approved investment instruments tied to futures for the first cryptocurrency.

“A regulated spot bitcoin ETP would provide increased protection for investors by making access safer and more transparent,” the letter said.

In August, US Rep. Warren Davidson called for Gensler to be removed from the position of head of the department due to the unsuccessful proceedings against Grayscale. He was preceded by a partial defeat of the regulator in the process against Ripple.

Financial services committee chairman Patrick McHenry also threatened the official with a subpoena for hisopacityto other departments and alleged links to the collapsed FTX and its ex-CEO Sam Bankman-Freedom.

More news on SEC cases

While the government continues its work, litigation in high-profile SEC cases continues. Let's look through the latest news.

SEC vs. Ripple

The New York District Court denied a U.S. Securities and Exchange Commission (SEC) motion to appeal the decision in Ripple, which found that selling XRP to retail investors did not constitute an offer of securities.

In an Oct. 3 filing, Judge Analisa Torres emphasized that the regulator did not provide a compelling justification for how the appeal could change the court's decision.

“The SEC’s motion for certification of interlocutory appeal is DENIED, and the SEC’s request for a stay is DENIED as moot. The Clerk of Court is directed to terminate the motion at ECF No. 892.”

Since the announcement, XRP's price has risen about 5.54%. At the time of publication, the asset is trading at $0.524.

Torres also noted that the Commission does not have sufficient evidence of the impact of “entrepreneurial or managerial efforts by others” on Ripple buyers.

The filing also argues that the SEC has not substantiated its claim that the “average” investor can review numerous statements and documents over 8 years and determine whether to invest in XRP by relying on Ripple's marketing efforts and public statements about future price potential.

The next trial in this case will take place on April 24, 2024.

SEC vs. Coinbase

The US Securities and Exchange Commission has asked a federal judge to reject an application from cryptocurrency exchange Coinbase in the regulator's lawsuit. In filing on Oct. 3 the SEC responded to Coinbase's claims by again outlining its position: some cryptocurrencies featured on the trading platform are investment contracts under the Howey test, so they must be registered with the SEC. The regulator noted that Coinbase “always knew” that cryptocurrencies sold on it were securities in accordance with the Howey test, and allegedly the exchange had already admitted this in its documents filed with the SEC. The agency disagreed with Coinbase's assertion that the SEC has no authority over the cryptocurrency market until Congress declares it. As the Commission put it, it did not assume any new authority to do what federal securities laws would prohibit.

“Each crypto asset issuer has given hope to investors and buyers trading on Coinbase that their investments will increase significantly, depending on the issuer's plan to develop and maintain the asset's value,” the SEC said.

Coinbase chief lawyer Paul Grewal wrote on Twitter that the SEC continues to make old arguments and the crypto assets that the regulator so stubbornly calls securities are not real and are not even in the jurisdiction of the Commission.

“The SEC’s arguments today would mean that everything from Pokemon cards to stamps to Swiftie bracelets are also securities. As @repritchie made so clear last week, that is simply not the law, nor should it be,” joked Grewal.

SEC vs. Do Kwon

In an updated lawsuit against Do Kwon, the SEC claims that the founder of Terraform Labs carried out fake transactions for partner payment platform Chai.

According to the agency, the heads of the two companies deceived investors by demonstrating that payments are made by the Terra blockchain. In fact, the transactions were settled "traditionally," the regulator noted.

Among the evidence, the SEC attached a screenshot of Kwon's chat with another Terraform co-founder Daniel Sheen. The latter created and headed the payment platform.

“I can just create fake transactions that look real, which will generate fees … and we can wind that down as Chai grows.” reports the then-CEO of Terraform.

Shin responded by expressing concern that users would find out about falsifying operations.

“All the power to those that can prove it’s fake … because I will try my best to make it indiscernible. I won’t tell if you won’t.”

The partnership between Terraform and Chai ended in 2020. But, according to the SEC, the cooperation lasted long enough to produce the scam scheme.

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