Recent court decisions have given crypto a boost. But Wall Street is lurking. Leonid Sukala – Getty Images
When long-standing crypto firm Grayscale defeated the SEC in the influential DC Circuit Court of Appeals last week, it was the industry’s most significant legal victory to date. The decision joins two other recent rulings that are likely to pave the way for cryptocurrencies into mainstream finance.
This should be a moment of celebration for Web3 enthusiasts – courts are removing long-standing legal barriers to blockchains adding billions of users – but this moment could also prove to be a crossroads in deciding how to “on-chain” these users. come – and whether this process will sustain the long-held value of decentralization and its benefits in the crypto community or whether this ideal will be betrayed.
Let’s take a look at the court rulings themselves, including the recent Grayscale case that challenged the SEC’s long-standing refusal to grant a spot Bitcoin ETF. Although the decision does not require the SEC to approve the ETF, it makes eventual approval almost a foregone conclusion (although the SEC delaying its decisions on all spot Bitcoin ETFs after the Grayscale decision means it will not be immediate will take place). One reason is that traditional financial institutions with which the SEC is likely more familiar – such as the world’s largest asset manager, Blackrock – are also interested in getting into the Bitcoin spot ETF game. As my colleague Peter Fox noted: “[r]Both e-commerce investors and institutions may be hanging on to bigger names,” and Grayscale may have inadvertently done Wall Street’s homework.
While the SEC could find ways to continue fighting over spot Bitcoin ETF listings, there could be a silver lining for the agency to admit defeat here, as it would guarantee the SEC a piece of the regulatory pie. One could even imagine a world where spot ETFs for crypto tokens other than BTC and ETH proliferate. While this could be a big win for the institutions that issue and manage these funds, a world in which retail traders primarily access these tokens through such funds – rather than holding, trading and using them directly through user-controlled digital wallets – would be a big win A huge waste of potential leads to the stifling of innovative business models that technology enables.
The recent ruling in the Ripple case in the Southern District of New York represents another major symbolic victory for the industry following last year’s scandals and market turmoil. I have previously written about this in more detail with my colleagues, but from today’s perspective it is important to note , that the order does not set a precedent (or win the case for Ripple). So the order’s knock-on effects are likely to be limited, and while it provides the industry with plenty of ammunition in the form of legal arguments to bolster various use cases and business models, the order’s actual impact could be as fleeting as Terra scammer Do Kwon’s 15 minutes full of glory.
Then there is the Uniswap case. While not an SEC-related decision lawsuit and the least-noticed of the three cases examined here, the recent dismissal of a class action lawsuit against Uniswap may prove influential in the long run. The case itself involved allegations from alleged “investors” that Uniswap, its CEO, and its largest venture capitalists were liable for fraudulent tokens sold by unknown actors using the company’s decentralized protocol.
Judge Polk Failla of the SDNY demonstrated a keen understanding of the function of decentralized technology and, with regard to liability under the Exchange Act, found that “the damage was caused by human intervention by third parties and not by the underlying platform.” Developers who write smart contracts do not enter into a legal contract with any user of such smart contract, she wrote, and therefore “it is logical that an author of computer code underlying a particular software platform could be held liable” for misuse of the platform by another person.
With this decision, we can observe a court that understands the technology, the loopholes, and the various arguments about how and why certain rules of the federal securities laws should – or should not – apply. The court also acknowledges that the state of industry regulation is changing, but the industry’s best ammunition is language supporting the proposition that writing code underlying a smart contract is not the job of a financial institution is. Not holding people liable for what bad actors do with their publicly released computer code is a good outcome.
However, this important victory could only prove to be a Pyrrhic victory if key legal issues (e.g. the security status of the token) are not resolved in a more comprehensive and systematic manner. Disputes resolved in court rarely produce the best solution. And while Wall Street can bring liquidity, know-how and legitimacy to cryptocurrencies, entrepreneurs must be given the opportunity to experiment with business models unlocked by the technology.
Otherwise, this mainstream moment will be a missed opportunity. Instead of a billion users holding and trading NFTs, yield farming via DeFi, and storing files on decentralized protocols like Filecoin, mainstream crypto could mean Wall Street offering financial products that integrate crypto and relegate blockchains to the backend. Instead of decentralized protocols empowering users through digital ownership, could mainstream crypto simply become the establishment usurping entrepreneurs – Wall Street eating Silicon Valley’s breakfast? I hope not, but the actions of business owners, courts and policymakers in the near future will answer this question.
Damien G. Scott is an attorney at Scoolidge, Peters, Russotti & Fox LLP. He previously served as general counsel and COO of CoinList Ventures and as chief compliance officer of another CoinList company, one of the first broker-dealers approved by FINRA to conduct private placements of digital securities. The opinions expressed in Fortune.com comments are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.
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