Many believe blockchains and crypto are a groundbreaking technology that enable creativity and entrepreneurship, and some regard these tools as just another internet fad.
Regardless of where you stand, it’s indisputable that the consumers and entrepreneurs alike in the burgeoning crypto and web3 sector face tremendous regulatory uncertainty, which holds the legitimate industry back and allows bad actors to flourish.
This tension was on full display as a federal district court just issued a much-anticipated summary judgment in the Securities and Exchange Commission’s lawsuit against Ripple Labs and two of its founders.
The ruling deems Ripple’s direct sales of their digital asset XRP to institutional investors to be securities offerings—which is in line with previous cases applying securities laws to initial coin offerings (ICOs) that dominated the industry in its early years. But in a blow to the SEC, the ruling did not extend the application of securities laws to Ripple’s—and its founders’—sales of XRP to individuals via certain digital asset exchange platforms.
While this is a potentially significant win for crypto, and a rebuff to the SEC’s ongoing war against it, the ruling results in a confusing set of outcomes which highlights the long standing uncertainty plaguing an industry clamoring for stability.
What are entrepreneurs to make of the decision? On the one hand, the ruling is not the definitive word on the issue and may be appealed. This means entrepreneurs may choose to continue current industry practices, where digital asset issuers mostly rely on the SEC’s helpful, but incomplete, decentralization framework from 2019—a process that mitigates many of the risks digital assets pose to consumers. But even some members of the SEC have tried to distance themselves from that framework and it has proven to not be sufficiently clear or robust enough to be effective.
On the other hand, the ruling opens an entirely different pathway for digital asset issuers, as it establishes that digital assets sales on exchange platforms are not governed by securities laws. But the ruling is also directly at odds with the SEC’s very recent actions against several major digital asset exchanges, including Coinbase.
Ultimately, what the Ripple ruling makes obvious is that the rules are anything but clear. And without clear rules, the SEC’s current regulation-by-enforcement posture toward crypto is hurting, not helping American innovation.
This uncertainty has already long acted as a drag on the pace of innovation and a feeding ground for bad actors. Responsible actors have been subject to dubious U.S. regulatory enforcement actions, while ill-intentioned firms launch products that flagrantly violate long standing rules – often beyond the reach of U.S. authorities until it is too late.
Unfortunately, this is likely to get worse before it gets better. Unless Congress acts quickly.
There are significant challenges to applying 80-year old precedents to novel technologies consistently. The unique advantages and risks of blockchain and crypto demand a new regulatory approach. Legitimate innovators and consumers of new products need clear rules of the road to build products with utility that can be purchased and used safely—and for use cases that go far beyond financial speculation.
The only way forward at this point is through thoughtful, well-calibrated legislation that protects consumers from scams and conflicts of interest—while still embracing the innovations of blockchain technology. Other countries around the globe have already reached this conclusion; the United States is falling behind.
So how do we not fall behind, yet also avoid more confusion and uncertainty? We recommend that U.S. legislators do three things:
First, ensure that both consumers and investors are protected by requiring registration and supervision of centralized firms. Regulators should be probing for risk arising from custodial relationships, conflicts of interests, and use of digital assets in illicit finance. We have seen many examples already of these regulatory failings.
Second, any legislation should provide the entrepreneurs who have been building non-centralized networks and legitimate businesses in spite of this uncertain environment a pathway to compliance.
Finally, laws and regulation should properly incentivize decentralization and community ownership and usage—the key characteristics of crypto and blockchain technology that drive the true benefits to the public and next-generation internet that this technology offers.
There are some hopeful signs: Progress is being made in both the House and the Senate on such legislation. We applaud Chairmen Patrick McHenry (R-N.C.) and G.T. Thompson (R-Pa.) and Senators Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (D-N.Y.) for attempting to create meaningful consumer protections through legislative frameworks that promote responsible innovation. We urge Congress to swiftly consider and pass such legislation before it’s too late.
This op-ed first appeared in Fortune on July 15, 2023.
The views expressed here are those of the individual AH Capital Management, L.L.C. (“a16z”) personnel quoted and are not necessarily the views of a16z or its affiliates. a16z is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration as an investment adviser does not imply any special skill or training. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by a16z. While taken from sources believed to be reliable, a16z has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party information; a16z has not reviewed such material and does not endorse any advertising content contained therein.
This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities, digital assets, investment strategies or techniques are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any fund managed by a16z. (An offering to invest in an a16z fund will be made only by the private placement memorandum, subscription agreement, and other relevant documentation of any such fund and should be read in their entirety.) Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by a16z, and there can be no assurance that the investments or investment strategies will be profitable or that other investments made in the future will have similar characteristics or results. A list of investments made by funds managed by Andreessen Horowitz (excluding investments for which the issuer has not provided permission for a16z to disclose publicly as well as unannounced investments in publicly traded digital assets) is available at https://a16z.com/investments/.
Additionally, this material is provided for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. Investing in pooled investment vehicles and/or digital assets includes many risks not fully discussed herein, including but not limited to, significant volatility, liquidity, technological, and regulatory risks. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see https://a16z.com/disclosures/ for additional important information.