How many more difficult days does the U.S. cryptocurrency industry have with improper SEC regulation and lagging congressional legislation?

Original Title: How American courts have become central to crypto law?

Author: John Cahill, Attorney at Wilson Elser

Compiled by: bayemon.eth, ChainCatcher

In the past year, blockchain technology has developed rapidly, and various news stories have reached a climax. From the arrest of SBF to the recent charges by the Securities and Exchange Commission (SEC) against Binance and Coinbase, the entire cryptocurrency world is in turmoil.

Despite many significant events, regulatory progress in the United States has been slow. It is well known that federal agencies need to regulate business activities according to the law, and the long-standing legal void has left many companies engaged in digital asset trading feeling dissatisfied. In contrast, Europe has already implemented comprehensive digital asset regulations, forcing the U.S. judicial system to expedite the interpretation of digital assets within the existing legal framework to ensure synchronization with global legal standards.

Role of the Executive Branch

The U.S. executive branch has yet to take a clear stance on digital assets, with almost all actions related to digital currencies being led by Congress. In March 2022, Biden issued an executive order titled "Ensuring Responsible Development of Digital Assets," emphasizing cooperation between the government and agencies to assess development risks and establish a safe and responsible development framework.

Following the executive order, the U.S. Financial Stability Oversight Council (FSOC) released a report titled "Digital Asset Financial Stability Risks and Regulatory Report," urging the clarification of regulatory responsibilities and the enforcement of the "existing regulatory framework." The report also called for measures to prevent regulatory arbitrage through legislation but provided little clear guidance on activities related to digital assets.

Challenges in the Legislative Branch

The U.S. Congress has held extensive hearings on digital assets, inviting key figures from the legal, business, and regulatory sectors. Recent hearings with the chairs of the SEC and the Commodity Futures Trading Commission (CFTC) revealed differing opinions surrounding cryptocurrencies and highlighted that the current legislative process has become stalled. To date, over 30 proposed bills related to digital assets have stalled at the introduction stage, and Congress has not passed any substantive legislation in this area. Perhaps due to political considerations or concerns about hot news and negative headlines, the legislative path in the U.S. Congress remains fraught with obstacles. Despite the legislative branch's efforts to gather information, they have been hesitant to take concrete action.

Leading European Regulation

In contrast to the U.S., the European Union has made significant progress in regulating digital assets. With its broad coverage, the EU's Markets in Crypto-Assets (MiCA) regulation has established a comprehensive framework, including definitions of digital assets, implementation of licensing requirements, and outlining the regulatory obligations of market participants. Notably, the regulation also addresses key issues such as anti-money laundering and counter-terrorism financing measures. After four years of revisions, the regulation still spans nearly 400 pages. Although MiCA still falls short in addressing key issues related to decentralized finance and lending, it has laid a solid foundation for future development.

The Increasing Dominance of U.S. Courts in Cryptocurrency Legislation

As regulatory progress in the U.S. remains stagnant, American courts have intensified their efforts to interpret digital asset activities within the existing legal framework. In 2023 alone, there have been numerous cases involving digital assets, many of which involve the SEC and the CFTC. Each regulatory agency faces criticism from legal professionals, their respective chairs, and other federal agencies. The U.S. Chamber of Commerce recently submitted a friend-of-the-court brief in Coinbase's lawsuit against the SEC, pointing out that the agency has triggered a "regulatory mess."

Coinbase's lawsuit demands that the SEC provide regulatory guidance on digital assets. The SEC responded that it has no obligation to issue new regulations, and Coinbase lacks the standing to sue them. Coinbase's response partially argues that the SEC's delay in taking new regulatory actions is due to its desire to enforce beyond the constraints of the law.

In addition to the "regulatory mess," the SEC has filed lawsuits against Binance and Coinbase. The lawsuits against these two largest cryptocurrency exchanges differ, but each includes allegations that the exchanges traded cryptocurrencies as unregulated securities, including mainstream cryptocurrencies like Matic (Polygon), SOL (Solana), and ADA (Cardano). Binance and its co-founder are accused of illegally raising customer funds, while Coinbase is accused of facilitating cryptocurrency trading since 2019 while evading the detailed disclosure process required by securities laws. Both Binance and Coinbase have issued statements strongly opposing these lawsuits, setting the stage for another legal battleground of "verbal attacks." In Coinbase's statement, its CEO Brian Armstrong stated that Congress needs to "solve this issue."

Guidance from the Judicial System

In the absence of strong regulatory agencies, the U.S. judicial system has provided valuable guidance in areas related to digital assets, such as insurance, contracts, securities, and intellectual property. Notably, cases involving trademark and copyright law have garnered global attention, showcasing the role of judges in shaping the landscape of digital assets.

However, the court system also faces other issues that may lead to delayed rulings. Today's courts are overwhelmed with numerous briefs detailing differing viewpoints on the securitization of digital assets, where significant public opinions can indeed lead to delays in rulings at the enforcement level. For example, in the SEC v. Ripple case, the SEC alleges that Ripple sold its native token XRP as an unregistered security. The case began in December 2020 and has involved around 130 lawyers to date, yet it remains unresolved. For the entire real world and the cryptocurrency market, the outcome of this lawsuit will reveal the U.S. position, thereby providing clear direction for the global regulatory decisions regarding the cryptocurrency market.

In the SEC's lawsuits against Coinbase and Binance, no allegations indicate that XRP is a so-called "security." This is likely a strategic move by the SEC to protect the agency in case of an unfavorable ruling in its lawsuit against Ripple. In the lawsuits against Coinbase and Binance, the SEC classifies 19 other cryptocurrencies as securities, undermining the possibility for blockchain companies to gain clear direction from Ripple's lawsuit. Furthermore, without legislation, these lawsuits will prolong the current state of uncertainty and lead the industry to gradually clarify amidst fragmented information.

Patience is Still Required

There are many reasons for the judicial branch's slow actions. While the courts study and formulate laws applicable to cryptocurrencies, digital currency companies are also seeking regulatory clarity from other countries. Unfortunately, it is unlikely that the U.S. will clarify legislation before the next election in 2024, but this does not mean that the U.S. will fall behind in digital currency regulation.

In the early stages of the internet, Europe was the first region to enact data and privacy laws. The first such law in Europe came into effect in 1984, coinciding with the U.S. elections. In the following year, the U.S. passed its own data protection legislation. Although there was some delay, historically, this did not hinder the U.S. from maintaining and becoming a leader in technology enterprises.

In the realm of digital assets, history is likely to repeat itself. People hope that the nation will formulate regulatory laws, but creating good regulations undoubtedly takes time. Waiting for the SEC may take longer than waiting for Congress to act, and regulations from a single agency are not as stringent as comprehensive legislation. As Congress and its constituents continue to understand this evolving technology, the U.S. court system, as a pioneer exploring this unknown legal territory, will inevitably strive to bridge the gap between existing laws and digital assets.