What happens when a cryptocurrency, once positioned as a regulator-friendly alternative to bitcoin, gets heat from regulators? The exchanges that trade XRP are about to find out.
US-based cryptocurrency exchanges must consider whether XRP will be removed from the list in light of a Securities and Exchange Commission (SEC) lawsuit, claiming it is an unregistered security issued by Ripple Labs to raise funds.
The main one of these exchanges is Coinbase, which, in addition to normal XRP listing considerations, is also seeking SEC approval to make its shares public and allow retail investors to trade them. If the SEC prevails in its lawsuit, XRP can be classified as a security, which means that, under United States law, entities offering it for trading must register as stock exchanges.
It is also possible that a SEC victory would destroy the value of XRP because the regulator wants to prevent Ripple from selling more tokens and for Ripple, CEO Brad Garlinghouse and President Chris Larsen to return their profits, pay pre-trial interest and pay penalties civilians.
While some exchanges, market makers and funds have already started closing XRP or withdrawing positions and transactions with the cryptocurrency, it may not be a black and white issue for larger exchanges.
Anthony Tu-Sekine, a partner at the law firm Seward & Kissel LLP, told CoinDesk that trading platforms like Coinbase “are between the hard and the hard.”
“They can continue to list XRP based on their previous analysis that XRP is not a title, with the hope that a court will find that XRP is not a title,” he said. “Or they can take ‘corrective’ actions, such as restricting wallet trading held by Americans, or withdrawing it entirely from their stock market.”
These scenarios are probably already covered by the exchanges’ terms of service policies, he said.
Exchanges like Coinbase “would be crazy not to consider” going public, said Gabriel Shapiro, a lawyer for Belcher, Smolen & Van Loo LLP. However, considering the issue is not the same as removing cryptocurrency from the list – or not.
“They need to think – including just from a business perspective, but also legally – what kind of precedent they are setting,” he said. “If they remove a [cryptocurrency] just because a regulator accuses you of being a title, what happens the next time it happens? You just gave the SEC the right to remove anything from your platform just because [it makes] an accusation? “
Unregistering digital assets on that basis may not be very good for stock exchange customers, said Shapiro.
“It is not an easy decision for [Coinbase] to just remove the list and, personally, if I were them, I don’t think I would remove it unless I had something more concrete to point out, ”he said.
A Coinbase spokesman declined to comment on this article.
What can happen
Coinbase, in particular, is in a unique position due to its impending initial public offering (IPO) or direct listing. It has already registered secrecy in the S-1, a way that companies use to register their shares as bonds. The SEC can provide feedback to the company on how it views potential risk factors or other aspects of its operations.
Last week, Shapiro told CoinDesk that this could essentially include forcing companies to take certain steps. While noting that he does not believe the SEC would explicitly tell Coinbase to remove the XRP from the list, the agency could say that not removing the XRP from the list could be a risk factor.
“You could say, ‘In your risk factors, you did not adequately explain to your investors in your IPO how you allowed XRP and others to trade on Coinbase … You need to be very clear about this … including that we could come after you Coinbase, because you have been warned, ‘”he said.
Coinbase could then decide to withdraw the XRP based on this feedback or, if the compliance burden is too great, it could even discard its IPO ambitions.
What Coinbase cannot do is pretend to be ignorant of how the SEC views XRP, Tu-Sekine said. The agency’s position is clear.
The SEC looks confident about its chances and has useful precedents for its cases against Telegram and Kik, Shapiro said.
“I think we all suspect that there would be a strong case, but I don’t think we realize how far Ripple has entered into market-creating deals,” he said of the allegations in the SEC complaint.
