Fintech

Ripple’s top lawyer says the SEC has declared war on crypto

The payments company has been battling regulators in court over whether a token it issued is a security.

​Ripple General Counsel Stuart Alderoty

Stuart Alderoty likes to "poke the bear."

Photo: Ripple

Stuart Alderoty, general counsel of Ripple, has been known to take part in what's become a popular pastime among top crypto executives: bashing regulators on Twitter.

Last month, he blasted the SEC's approach to crypto companies, arguing that when the "SEC doesn't get unconditional surrender, it ramps up intimidation and aggression."

"In other countries that's called tyranny," Alderoty tweeted.

The strongly worded attacks are surprising coming from a lawyer — a profession known more for telling clients when to zip their lips. But Ripple is at the center of one of the biggest legal battles in crypto. The SEC sued the company in December, arguing that XRP, the cryptocurrency it uses to facilitate payments, is not a currency but a security, and therefore subject to strict securities laws.

The legal brawl, which shows no sign of a quick resolution, will likely shape coming debates over crypto regulations. On Tuesday, Ripple expanded the scope of that fight by unveiling proposals on how it thinks the federal government should approach the fast-growing industry.

The Ripple proposals include endorsements of proposed bills in Congress, including the Securities Clarity Act, which would address the confusion over whether crypto tokens are currencies or securities, and the Digital Commodity Exchange Act, which would give the CFTC authority to regulate digital assets trading.

Ripple is also pushing for the creation of a formal working group on crypto which would include both private companies and federal agencies. The proposal includes the SEC, Alderoty's Twitter punching bag.

He doesn't regret his tweets, even as Ripple makes a pitch for the feds and the crypto industry to start getting along and working together.

"Why would you poke the bear if you're trying to get the bear to cooperate?" he told Protocol. "It's clear that the bear has no interest in cooperating. This rational approach to crypto regulation that we're proposing is to basically say, 'Look, there are other leaders in the space.The SEC does not have a monopoly on this issue.'"

Alderoty elaborated on this in an interview with Protocol. He also drilled down on Ripple's vision for crypto regs and how the infrastructure bill "amplifies the dangers of trying to legislate a technology without first understanding what it is you're legislating."

This interview was edited for brevity and clarity.

Why put out these proposals now?

There needs to be a robust private and public partnership and collaboration. We wanted to do something that was pragmatic and not necessarily invent the wheel. We're saying, "Look, there are a lot of good ideas that are already out there by some policymakers that are trying to take a leadership position."

One of the big disputes is whether cryptocurrencies should be considered currencies or securities. You endorse the Securities Clarity Act, which essentially creates a new term, "investment contract assets," that would cover crypto assets. How would that change the way crypto is viewed?

What the Securities Clarity Act is trying to do is to basically say oranges are not the security, if you know my reference to the Howey Test. Under Howey, an investment contract or a contract for an investment, that's the security. In the 1946 Supreme Court case, folks were investing in management contracts. Somebody would own the citrus groves. They would plant the orange trees. They would fertilize the orange trees. They would harvest the oranges. They would sell the oranges. They would pull the money and then they would distribute the profits.

What the Supreme Court found was that it was a contract for an investment. But the oranges themselves were not the securities. One of the areas that is incredibly unclear — and I think intentionally [made] unclear by the SEC — is whether or not the asset itself is a security or whether the distribution and the sale of the asset under certain circumstances is a security. What the Securities Clarity Act is basically saying is the oranges are not the security.

You also endorse a bill that would create "digital commodity exchanges." Can you break that down? How would that lead to more clarity in the crypto industry?

I think this is a really important policy proposal. And I think it's a meaningful policy proposal. And I think of all of the policy proposals that are out there, this one could have the greatest impact and really go the furthest in bringing clarity to how these assets are traded in exchange in the U.S.

What the Digital Commodity Exchange Act proposes is to say, look, these assets are traded on exchanges like Coinbase, etc. These exchanges are [for] spot market trading principally of commodities. The Commodity Futures Trading Commission is uniquely designed and purposed to oversee spot market trading for fraud and for market manipulation. So these assets will essentially be grandfathered in. We give that jurisdiction to the CFTC and allow these exchanges to be regulated at the federal level. Right now, they're regulated at the state level for money transmitter licenses. Let's create a federal regime and let's give that responsibility that oversight to the CFTC. So, the assets can trade under the supervision and regulation of a well qualified regulator.

And this refers specifically to cryptocurrencies and digital assets.

Absolutely. Remember, right now, these digital asset exchanges like Coinbase, they're supervised at the state level. There's no uniform, federal regulatory regime to monitor or to regulate these exchanges. When we talk about creating a rational approach to crypto regulation, I'm not talking about being free from regulation. We're talking about a rational approach which can allow innovation to thrive, which can allow the assets to be traded, but also guard against things like fraud, guard against market manipulation, so consumers are protected.

You also mention the need for a collaborative working group, including the SEC, the CFTC and private companies. Why is that not already being done?

That's a good question. Why hasn't this been done in the U.S., right? We do have a fragmented regulatory system over financial services and we have a commodity regulator. We have a securities regulator. In the U.S., maybe that's the nature of the beast. What we're saying is that these regulators should get together with private market participants to see what the rational approach is.

Why hasn't that been done? It's anyone's educated guess. I think there is some politics involved. I think there's some regulatory turf battles going on. I think there's some regulatory land grabs that are going on. Unfortunately, what is suffering is the innovation and the technology and the consumers.

You also support proposals for a safe harbor regime, or a sandbox, for developers and those involved in creating and maintaining the technology of blockchain and crypto. Why is this important?

The market now has grown to over $3 trillion. The U.S. needs solutions for this massive crypto economy and we don't have it. That's what these other solutions that we've talked about would accomplish. What a sandbox approach or safe harbor approach would say is, "We simply can't come up with a solution to the existing world. We have to allow for innovation to continue to evolve and grow. And we need a safe place for that to happen." There are other jurisdictions that have sandbox models or safe harbor models [where] regulators provide a safe space for this innovation to be built without threat of regulatory enforcement.

It's not happening outside of the regulatory perimeter. It's happening sort of under the supervision of the regulators, but there's a safe space for it to happen. If you get it right, great. But if you get it wrong, you're not immediately punished with an enforcement action that will cripple or bankrupt your company or drive your company outside of the U.S. [But] fraud would never be protected.

What do you think of the Coinbase proposal to create a new regulator or regulatory body just for digital assets and crypto?

I think that Coinbase is a responsible actor in the space. I think they're one of the adults in the room. I think their proposal is worthy of discussion. I think what we're proposing perhaps is a bit more pragmatic and a bit more attainable. But I don't want to necessarily be dismissive of any other proposal, which is why I think private and public partnership is really so important. All of these proposals can get on the table and we can vet them and understand what's the best path.

A lot of the positions and proposals get amplified on Twitter where you've also been very active. Last month, you tweeted a criticism of the SEC in which you used the word "tyranny" to describe how it has dealt with crypto and crypto companies. Can you talk about the way you and other crypto industry leaders, including Ripple CEO Brad Garlinghouse and Coinbase CEO Brian Armstrong have often used strong language in presenting positions?

I think that's sort of the nature of the conversation these days. Brian Armstrong expressed his frustration after its Lend product was shut down by the SEC when they took the SEC's invitation to speak with them. I think what the frustration that we're hearing is this approach to regulation by enforcement.

We're not going to get to a solution if you say, "Come in and talk to us. But when you come in and talk to us, we're going to lock the door behind you. We're going to actually begin a not-so-secret or a secret Inquisition. And then if you don't give us unconditional surrender, we're going to either bring an enforcement action or threat of an enforcement action."

That is not a productive path to get to a rational regulatory framework in this country. That's what's being aired on platforms like Twitter, that frustration. The SEC has not been shy. Their current chair and others have been on a pretty aggressive media tour where they are coming up very aggressively and essentially declaring outright war on this space. It leaves little choice for responsible actors who are trying to get to the right solution in this space to express their frustration and their views.

I guess probably embedded in your question, Ben, is well, why would you poke the bear?

Exactly.

Why would you poke the bear if you're trying to get to the bear to cooperate? It's clear that the bear has no interest in cooperating.The interest of the bear would be to chase you down and to hunt you down, which is really what the SEC said it wants to do. This rational approach to crypto regulation that we're proposing is to basically say, "Look, there are other leaders in the space, other policy thought leaders.The SEC does not have a monopoly on this issue." In fact, the aggression of the SEC is doing really significant damage to the U.S. position in this new crypto technology space.

If you think about the internet, in 1995 and 1996, the U.S. made an informed decision, even though they didn't fully understand that technology. They understood the promise of the technology, and they were smart enough to realize that they couldn't regulate that technology with laws, rules and regulations that were designed for transistor radios and rotary telephones. They needed to give technology a safe space to grow within a broad regulatory perimeter. That's what we're asking for here.

I'm curious about the decision to use the word "tyranny," which some would say is over the top.

I guess my reaction is we're in litigation with the SEC. We're at odds with the SEC. If the SEC and Ripple cannot find a way to kind of resolve their differences and that resolution only comes with regulatory clarity, our differences are going to be resolved in the court. How the SEC views a few words that we're using publicly is probably pretty irrelevant right now.

How has the debate over the infrastructure bill which has involved the crypto industry impacted the conversations that you're involved in on the regulatory front?

The infrastructure package really amplifies the dangers of trying to legislate a technology without first understanding what it is you're legislating because the collateral consequences of what you put down in paper can be pretty broad. You may not even appreciate what those collateral consequences are.

I don't think anyone necessarily would argue that we need appropriate taxation of the exchange of crypto. That's a non-controversial proposition. But how do you accomplish that, though, when you are delving into a new technology that you don't fully understand? That's what I think folks drafting the infrastructure bill got wrong. Read at face value, it could hold folks who don't even know who the counterparties are responsible for reporting potentially taxable transactions. That just won't work as a practical matter. So we have a law that is unworkable, that doesn't reflect a clear understanding of the technology.

Eventually, I think it will sort itself out through an amendment or potentially through litigation. Which is why you need a robust, private and public collaboration before you get to policy solutions. If the infrastructure language was being drafted with private participants in the room who could help inform what the policy outcome is, help do it in a way that doesn't result in unintended collateral consequences that can be really damaging, impractical and probably unenforceable, that's probably a better way to start.

Entertainment

Niantic is building an AR map of the world

The company’s Visual Positioning System will help developers build location-based AR games and experiences; a new social app aims to help with AR content discovery.

VPS will allow developers to build location-based AR experiences for tens of thousands of public spaces.

Image: Niantic

Pokémon Go maker Niantic has quietly been building a 3D AR map of the world. Now, the company is getting ready to share the fruits of its labor with third-party developers: Niantic announced the launch of its Lightship Visual Positioning System at its developer summit in San Francisco on Tuesday. VPS will allow developers to build location-based AR experiences for tens of thousands of public spaces, Niantic said.

Niantic also announced a new service called Campfire that adds a social discovery layer to AR, starting with Niantic’s own games. Both announcements show that Niantic wants to be much more than a game developer with just one or two hit apps (and a couple of flops). Instead, it aims to play a key role in the future of AR — and it’s relying on millions of Ingress and Pokémon Go players to help build that future.

Keep Reading Show less
Janko Roettgers

Janko Roettgers (@jank0) is a senior reporter at Protocol, reporting on the shifting power dynamics between tech, media, and entertainment, including the impact of new technologies. Previously, Janko was Variety's first-ever technology writer in San Francisco, where he covered big tech and emerging technologies. He has reported for Gigaom, Frankfurter Rundschau, Berliner Zeitung, and ORF, among others. He has written three books on consumer cord-cutting and online music and co-edited an anthology on internet subcultures. He lives with his family in Oakland.

Sponsored Content

Why the digital transformation of industries is creating a more sustainable future

Qualcomm’s chief sustainability officer Angela Baker on how companies can view going “digital” as a way not only toward growth, as laid out in a recent report, but also toward establishing and meeting environmental, social and governance goals.

Three letters dominate business practice at present: ESG, or environmental, social and governance goals. The number of mentions of the environment in financial earnings has doubled in the last five years, according to GlobalData: 600,000 companies mentioned the term in their annual or quarterly results last year.

But meeting those ESG goals can be a challenge — one that businesses can’t and shouldn’t take lightly. Ahead of an exclusive fireside chat at Davos, Angela Baker, chief sustainability officer at Qualcomm, sat down with Protocol to speak about how best to achieve those targets and how Qualcomm thinks about its own sustainability strategy, net zero commitment, other ESG targets and more.

Keep Reading Show less
Chris Stokel-Walker

Chris Stokel-Walker is a freelance technology and culture journalist and author of "YouTubers: How YouTube Shook Up TV and Created a New Generation of Stars." His work has been published in The New York Times, The Guardian and Wired.

Workplace

Why it's time to give all your employees executive coaching

In an effort to boost retention and engagement, companies are rolling out access to executive coaching to all of their employees.

Coaching is among personalized and exclusive benefits employers chose to offer their workforce during the pandemic.

Image: Christopher T. Fong/Protocol

Executive coaching has long been a quiet force behind leaders in the tech industry, but that premium benefit, often only offered to the top executives, is changing. A new wave of executive coaching services are hitting the market aimed at workers who would have traditionally been excluded from access.

Tech companies know that in order to stay competitive in today’s still-hot job market, it pays to offer more personalized and exclusive benefits. Chief People Officer Annette Reavis says Envoy, a workplace tech company, offers all employees access to a broad range of opportunities. “We offer everyone an L&D credit that they can spend on outside learning, whether it's executive coaching or learning a new coding language. We do this so that people can have access to and learn skills specific to their job.”

Keep Reading Show less
Amber Burton

Amber Burton (@amberbburton) is a reporter at Protocol. Previously, she covered personal finance and diversity in business at The Wall Street Journal. She earned an M.S. in Strategic Communications from Columbia University and B.A. in English and Journalism from Wake Forest University. She lives in North Carolina.

Enterprise

Microsoft thinks Windows developers are ready for virtual workstations

The new Microsoft Dev Box service, coupled with Azure Deployment Environments, lets developers go from code to the cloud faster than ever.

Microsoft hopes a new cloud service will address one of developers' biggest challenges.

Photo: Grant Hindsley/Bloomberg via Getty Images

Microsoft hopes a new cloud service will address one of the biggest challenges that developers have raised with the technology giant over the last several years: managing developer workstations.

Microsoft Dev Box, now in private preview, creates virtual developer workstations running its Windows operating system in the cloud, allowing development teams to standardize how those fundamental tools are initialized, set up and managed.

Keep Reading Show less
Donna Goodison

Donna Goodison (@dgoodison) is Protocol's senior reporter focusing on enterprise infrastructure technology, from the 'Big 3' cloud computing providers to data centers. She previously covered the public cloud at CRN after 15 years as a business reporter for the Boston Herald. Based in Massachusetts, she also has worked as a Boston Globe freelancer, business reporter at the Boston Business Journal and real estate reporter at Banker & Tradesman after toiling at weekly newspapers.

Enterprise

Okta CEO: 'We should have done a better job' with the Lapsus$ breach

In an interview with Protocol, Okta CEO Todd McKinnon said the cybersecurity firm could’ve done a lot of things better after the Lapsus$ breach of a third-party support provider earlier this year.

From talking to hundreds of customers, “I've had a good sense of the sentiment and the frustrations,” McKinnon said.

Photo: David Paul Morris via Getty Images

Okta co-founder and CEO Todd McKinnon agrees with you: Disclosing a breach that impacts customer data should not take months.

“If that happens in January, customers can't be finding out about it in March,” McKinnon said in an interview with Protocol.

Keep Reading Show less
Kyle Alspach

Kyle Alspach ( @KyleAlspach) is a senior reporter at Protocol, focused on cybersecurity. He has covered the tech industry since 2010 for outlets including VentureBeat, CRN and the Boston Globe. He lives in Portland, Oregon, and can be reached at kalspach@procotol.com.

Latest Stories
Bulletins