And Then You Win

In a blow to the SEC, a judge has ruled the XRP is not a security. While likely to be appealed, this is a devastating blow to Gary Gensler’s regime.

If you’re in crypto, having dealt with the past 1.5 years of tokens going down, fraud at a mass scale and regulatory pressure looming…this is one of the brightest days that crypto has ever seen.

There’s an old quote by Gandhi that states: “First they ignore you, then they laugh at you, then they fight you, then you win.” In this moment which is sure to be fleeting, it does feel like we have “won”, or at least gotten our first very VERY meaningful regulatory win.

Why is this such a big deal? Well, because for securities to be traded in the United States, they must be registered with the SEC. Therefore, if a U.S. exchange like Coinbase facilitates the trading of tokens that are actually unregistered securities, it is breaking the law. Gary Gensler, Head of the SEC has repeated that Coinbase is operating as an unregistered securities exchange, citing the nature of cryptocurrencies to clearly be securities. For Gary, the XRP ruling is a devastating outcome that he is likely to appeal.

So far, the SEC has failed to provide guidelines for tokens to register as securities, as naturally it’s difficult to take a law created in 1946 for citrus groves and apply it towards permissionless public networks. This lack of guidance has discouraged compliant behavior from industry participants. In fact, projects that have actively pursued regulatory compliance have often found themselves subjected to investigations rather than cooperation. For projects unable to afford the legal costs of an SEC investigation, it is not feasible to risk pursuing “compliance” when the path to compliance is unclear and nearly impossible.

This ruling does what the SEC has failed to do: provide a path towards pursuing compliance for cryptocurrencies in the United States. The actual ruling said this: “XRP, as a digital token, is not in and of itself a contract, transaction, or scheme” that embodies the Howey requirements of an investment contract.” Ripple’s Chief Legal Officer weighed in, “A huge win today – as a matter of law – XRP is not a security. Also a matter of law – sales on exchanges are not securities. Sales by executives are not securities. Other XRP distributions – to developers, to charities, to employees are not securities.”

There certainly is too much nuance involved in the final legal decision to accurately dissect it, but I will highlight a tweet that has been making the rounds at Delphi as the most accurate portrayal of the situation:

In my opinion, the most important factor of this outcome is that the judge determined that there are nuances involved over *when* something is and isn’t a security, and found that at some times, an $XRP token can be a security, and at times can NOT be a security. This aligns with former SEC director Bill Hinman’s statements in the renowned Hinman Docs. Sure, XRP may have been a security when it was initially created, but what about now, nearly 10 years later? Part of the allure of magic internet money is the ever-changing characteristics of the coins we know and love.

It’s tough to state just how large of a win this is for the industry. Just a few weeks ago, when the SEC sued Coinbase for operating as an unregistered securities exchange, it named some of the largest cryptocurrencies such as Cardano, Polygon and Solana as examples of the securities that Coinbase was hosting. In response to this, Robinhood announced it would be delisting these 3 cryptocurrencies almost immediately after the announcement of the SEC’s lawsuit.

In that moment, the industry faced an uncomfortable reality where nearly the entire ecosystem could have been classified as securities. This was a low moment, which was followed by 15 minute -20% candles for Cardano, Polygon and Solana the day after the announcement. In its resilient nature, the industry managed to respond with an extreme show of force. BlackRock has filed a Bitcoin ETF, and XRP has been declared not a security.

While the path to adoption will undoubtedly still be rocky, there does seem to be rationality around digital assets that is spreading to the highest level. “First they ignore you, then they laugh at you, then they fight you, then you win.” In this moment, I think it’s okay to pause and just celebrate this win. It is a win not only for the industry, but for the United States as a whole.

📖 Delphi Reads (Alpha Feed Unlocked)

Ripple Effect
The main impact of the Ripple decision is that it tears apart the premise that regulation by enforcement has ever been a smart or viable tactic. Now the SEC has lost their talking points around their perfect record on enforcement because they picked a fight with a defendant with the actual resources to fight back (which might be telling as the Coinbase litigation moves forward).

SOL Eyeing Up Breakout
Many names are on the move today, but SOL is one I’ve had my eye on ever since its early June selloff. We noted the favorable setup for SOL in our latest Markets deep dive: “And if we are approaching an inflection point for the broader crypto market, SOL is on our radar as one that looks poised for an even bigger move.” Here’s the chart from the report…

Arkham Opens a Can of Worms Nobody Expected
Arkham Intel announced its latest product, an on-chain intelligence exchange allowing people to buy and sell information around addresses. One Twitter user astutely labels this as “dox-to-earn”, as it essentially allows sleuths — or anyone with knowledge of who controls a specific address — to sell this information to willing parties.