**Blockchain and Crypto: The Regulatory Uncertainty**
*Many believe blockchains and crypto are a groundbreaking technology that enable creativity and entrepreneurship, and some regard these tools as just another internet fad.*
The Regulatory Uncertainty in the Crypto and Web3 Sector
The consumers and entrepreneurs in the crypto and web3 sector face significant regulatory uncertainty, which impedes the industry’s growth and allows bad actors to thrive. This uncertainty was evident when a federal district court made a landmark judgment in the Securities and Exchange Commission’s (SEC) lawsuit against Ripple Labs and its founders.
Ripple’s XRP Sales Ruled as Securities Offerings
The court ruling deems Ripple’s direct sales of their digital asset XRP to institutional investors as securities offerings. This ruling aligns with previous cases applying securities laws to initial coin offerings (ICOs) prevalent in the early years of the industry. However, the ruling does not extend the application of securities laws to Ripple’s sales of XRP to individuals via certain digital asset exchange platforms.
Confusing Outcomes Highlighting Industry Uncertainty
While the ruling can be seen as a win for the crypto industry and a setback for the SEC’s efforts, it also creates a confusing set of outcomes. This confusion emphasizes the long-standing uncertainty that impedes the industry’s progress and stability.
Two Paths for Digital Asset Issuers
The court ruling presents two distinct paths for digital asset issuers. First, they can continue following current industry practices, relying on the SEC’s decentralization framework from 2019. However, this framework lacks clarity and efficacy, as some SEC members have distanced themselves from it. Second, the ruling establishes that digital asset sales on exchange platforms are not subject to securities laws. However, this contradicts the SEC’s recent actions against major exchanges like Coinbase.
Lack of Clear Rules Hinders American Innovation
The Ripple ruling highlights the lack of clear rules governing the crypto industry. The SEC’s current regulation-by-enforcement approach creates uncertainty and hampers innovation. Responsible actors are subject to ambiguous regulatory actions, while malicious firms violate rules with impunity.
The Need for Thoughtful Legislation
To address the challenges of applying existing precedents to novel technologies like blockchain and crypto, a new regulatory approach is necessary. Clear rules are vital for legitimate innovators and consumers to develop and use products safely, beyond mere financial speculation. Other countries have recognized this need and have implemented legislation, placing the United States at a disadvantage.
Recommendations for U.S. Legislators
To avoid falling further behind and ensure clarity and stability, U.S. legislators should take the following steps:
1. Protect Consumers and Investors: Register and supervise centralized firms to safeguard consumers and investors. Investigate risks arising from custodial relationships, conflicts of interest, and illicit finance involving digital assets.
2. Provide Pathways to Compliance: Legislation should offer entrepreneurs building non-centralized networks and legitimate businesses a clear path to compliance, enabling responsible innovation.
3. Incentivize Decentralization and Community Ownership: Laws and regulations should promote decentralization and community ownership, vital aspects of the blockchain and crypto technology that benefit the public and drive the next-generation internet.
Positive Developments in Congress
There are positive developments in the House and the Senate, with lawmakers working on legislation that promotes responsible innovation and consumer protection. Chairmen Patrick McHenry and G.T. Thompson, along with Senators Cynthia Lummis and Kristen Gillbrand, deserve recognition for their efforts. Swift action is necessary to pass such legislation before it’s too late.
Authors’ Credentials
Miles Jennings, the General Counsel and Head of Decentralization at a16z crypto, and Brian Quintenz, the Global Head of Policy at a16z crypto, authored this piece. Miles Jennings is a former partner at Latham & Watkins, while Brian Quintenz previously served as a Commissioner of the U.S. Commodity Futures Trading Commission.
Disclaimer
The opinions expressed in this commentary represent the authors’ views and not necessarily those of Fortune. Disclosure: a16z manages funds with investments in Ripple Labs.
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