Protocol | 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?


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.

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