The industry’s best-known legal triumph to date came last week when veteran cryptocurrency firm Grayscale defeated the SEC before the prestigious D.C. Circuit Court of Appeals. The judgement joins two other recent decisions that are likely to open the door for cryptocurrency to enter the mainstream financial system.
The courts are removing long-standing legal barriers to blockchains adding billions of users, which should be cause for celebration for Web3 enthusiasts. However, this moment may also prove to be a turning point in how those users “get on chain and whether or not that process will uphold the crypto community’s long-cherished value of decentralisation and its advantages or whether that ideal will be compromised.
Let’s look at some of the court decisions, such as the most recent Grayscale lawsuit, which contested the SEC’s persistent opposition to approving a spot Bitcoin ETF. The Grayscale ruling delays the SEC’s decisions on all spot bitcoin ETFs, so it won’t happen right away, but it almost guarantees that the ETF will eventually be approved, even if the SEC is not required to do so. This is due, in part, to the fact that traditional financial organisations with which the SEC is probably more familiar, including Blackrock, the largest money manager in the world, are eager to participate in the bitcoin spot-ETF market. Retail investors and institutions alike may be attached to bigger names,” as my colleague Peter Fox put it, and Grayscale may have unknowingly been doing Wall Street’s homework.
Although the SEC may find a way to continue battling for spot bitcoin ETF listings, the agency may see a benefit in accepting defeat in this case because doing so would ensure that the SEC receives a piece of the regulatory pie. Even a future when spot ETFs for crypto currencies other than BTC and ETH are widely available is imaginable. A world where 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 huge waste of potential and stifle innovative business models that the technology enables. This is true even though it may be a big win for the institutions issuing and managing those funds.
After the scandals and market slump of the previous year, the recent ruling in the Ripple case in the Southern District of New York signals yet another significant symbolic triumph for the sector. The order does not set a precedent (or win the case for Ripple), which is crucial to remember for the time being. I wrote more extensively about this before with my colleagues. The order’s ripple effects are therefore likely to be minimal, and even if it gives the industry plenty of ammo in the shape of legal arguments to support different use cases and business models, the order’s actual impacts might be as short-lived as Terra scammer Do Kwon’s 15 minutes of fame.
The Uniswap situation is another example. The recent dismissal of a class action against Uniswap is likely to have an impact in the long run, despite not being an SEC-related decision and being the least well-known of the three instances we’ve looked at here. In the actual case, purported “investors” alleged that the CEO of Uniswap, its largest venture capital backers, and the company were responsible for fraudulent tokens sold by unidentified parties who were utilising the firm’s decentralised platform.
Judge Polk Failla of the SDNY determined, with regard to liability under the Exchange Act, that “third-party human intervention caused the harm, not the underlying platform,” demonstrating a keen comprehension of the operation of the decentralised technology at issue.
Our ability to see a court that is aware of technology, legal voids, and many justifications for and against the application of specific federal securities law rules is made possible by this ruling. The court also acknowledges that industry regulation is in flux, but the language supporting the idea that authoring the code for a smart contract does not constitute a financial institution is the best defence for the sector. It’s a wonderful outcome when people are not held accountable for what criminals do with their publicly available computer code.
However, if significant legal issues (such as the security status of tokens) are not resolved in a more thorough and systemic way, this significant triumph might merely be a mirage. Court-resolved disputes rarely result in the optimal course of action. Additionally, while Wall Street can provide cryptocurrency with liquidity, expertise, and credibility, company owners must be permitted to test the new business models that the technology has made possible.
Otherwise, this historical opportunity would be lost. A mainstream cryptocurrency may imply Wall Street delivering financial products that integrate crypto, relegating blockchains to the backend, as opposed to a billion users owning and trading NFTs, yield farming through DeFi, and storing files on decentralised protocols like Filecoin. Could mainstream cryptocurrencies merely become the establishment usurping the entrepreneurs—Wall Street eating Silicon Valley’s breakfast—rather than decentralised protocols empowering consumers through digital ownership? Though I hope not, the decisions made by businesspeople, judges, and policymakers in the near future will provide the answer.