Last week, longtime cryptocurrency firm Grayscale defeated the SEC in the influential D.C. Circuit Court of Appeals in the industry’s most high-profile legal victory to date. The decision, along with two other recent rulings, could pave the way for cryptocurrencies to enter mainstream finance.
This should be a moment of celebration for Web3 enthusiasts—courts are clearing longstanding legal hurdles to blockchain adding billions of users—but this moment could also become a crossroads in determining how those users get “on-chain.” mouth — and whether the process will uphold the value of decentralization and its benefits that the crypto community has long cherished, or whether that ideal will be betrayed.
Let’s take a look at the court rulings themselves, including the recent Grayscale case, which challenged the SEC’s longstanding refusal to grant a spot Bitcoin ETF. While the decision does not require the SEC to approve the ETF, final approval is all but a foregone conclusion (although the SEC delayed a decision on all spot Bitcoin ETFs following the Grayscale decision, meaning approval will not be immediate). One reason is that traditional financial institutions that the SEC may prefer to deal with, such as BlackRock, the world’s largest money manager, are also keen to get in on the Bitcoin spot ETF game. As my colleague Peter Fox observed, “retail investors and institutions alike are likely to cling to the bigger names,” and Grayscale may have inadvertently done Wall Street’s homework.
While the SEC may find a way to continue its fight for a Bitcoin ETF spot listing, the agency may see a glimmer of hope in admitting defeat, as that would guarantee the SEC a piece of the regulatory pie. One could even see a world where spot ETFs proliferate for crypto tokens beyond BTC and ETH. While this could be a huge win for the institutions that issue and manage these funds, it would be more likely if retail traders primarily acquired these tokens through these funds rather than holding, trading, and using them directly through user-controlled digital wallets. Then that would be a huge win. The huge waste of potential stifles the innovative business models brought about by technology.
The Southern District of New York’s recent ruling in the Ripple case marks another major symbolic victory for the industry following last year’s scandals and market panic. I discussed this in more detail with colleagues earlier, but, for present purposes, it’s important to note that this order does not set a precedent (or win a case for Ripple). The ripple effects of the order are therefore likely to be limited, and while it does provide the industry with ample ammunition in the form of legal arguments to support a variety of use cases and business models, the real impact of the order is likely to be something like Terra Liar Do Kwon’s 15 is so fleeting. minutes of fame.
Then there is the case of Uniswap. Although not an SEC-related decision-making action and the least high-profile of the three cases reviewed here, the recent dismissal of the class action lawsuit against Uniswap could have long-term consequences. The case itself involves claims by putative “investors” that Uniswap, its CEO and its largest venture capital backer were responsible for fraudulent tokens sold by unknown parties using the company’s decentralized protocol.
SDNY Judge Polk Failla, who has a skilled understanding of the capabilities of the decentralized technology at issue, found that with regard to liability under the Exchange Act, “it was the human intervention of a third party that caused the harm, not the underlying platform.” She wrote, Developers who write smart contracts do not enter into legal contracts with any users of such smart contracts, so “this goes against the logic that a drafter of computer code underlying a particular software platform could be held liable for others’ misuse of that platform.”
The decision provides a look at a court that understands technology, legal gaps, and the various arguments over how and why specific rules in federal securities laws should or should not apply. The court also acknowledged that the regulatory landscape of the industry is constantly changing, but that the best ammunition for the industry is language that supports the claim that it is not the financial institution’s job to write the code underlying smart contracts. Not holding people accountable for what bad actors do with publicly released computer code is a good outcome.
However, this important victory could come at a heavy cost if important legal issues, such as the security status of the tokens, are not addressed in a more comprehensive and systematic manner. Resolving disputes in court is rarely the best policy. While Wall Street can bring liquidity, expertise and legitimacy to cryptocurrencies, entrepreneurs must be allowed to experiment with business models unlocked by the technology.
Otherwise, this mainstream moment will be a missed opportunity. Mainstream cryptocurrencies could mean Wall Street offering financial products that integrate cryptocurrencies, relegating blockchain to the backend, instead of a billion users holding and trading NFTs, liquidity mining via DeFi, and storing files on Filecoin, etc. On the centralized protocol. Instead of being decentralized protocols that empower users through digital ownership, mainstream cryptocurrencies simply become institutions that usurp entrepreneurs—Wall Street eating Silicon Valley’s breakfast? I hope not, but actions by entrepreneurs, courts, and policymakers in the near future will answer that question.
Damien G. Scott is an attorney at Scoolidge, Peters, Russotti & Fox LLP. He previously served as general counsel and chief operating officer of CoinList Ventures, as well as chief compliance officer of another CoinList entity, which was one of the first broker-dealers approved by FINRA to conduct private placements of digital asset securities. The views expressed in Fortune opinion pieces are solely those of the author and do not necessarily reflect the views and beliefs of: wealth.
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