Enforcement actions by the Securities and Exchange Commission (SEC) are rarely good news for organizations, and the action taken against Ripple and XRP illustrate the need for more clarity around crypto accounting and reporting.
Just as 2020 was wrapping up, the SEC made public the news that the regulator was filing suit against the parent company of the cryptocurrency XRP, Ripple, and the two co-founders of the organization. Without diving into too much of the legal minutia, the primary points of this legal action center around the classification of XRP.
In the filing, the SEC alleges that the XRP cryptocurrency was offered in an illegal and ongoing securities offering that has raised over $1.3 billion. Following the filing of this action, there have been numerous articles, podcasts, lawsuits, and countersuits, but there is one angle in this far-ranging conversation that continues to fly below the radar.
This complaint and subsequent lawsuits center around the allegation that XRP is, in fact, a security and that Ripple should be operating in full compliance of an organization conducting an equity offering.
In other words, it seems that the flurry of activity around this action is amplified by the fact that – as of this writing – there have yet to be crypto-specific accounting, reporting, and disclosure rules that are consistently enforceable and comparable on a global, or even national, basis.
Establishing blockchain and crypto specific rules and guidance is an imperative for continued adoption outside of price speculation, but the importance of doing so has arguably never been as critical as 2021 gets underway. Let’s take a look at just a few of the benefits that more crypto-specific accounting and reporting guidance would have for wider adoption.
Larger and more transparent investments. There are few things that can discourage or diminish investment in, and adoption of, any new technology or idea, than legal and regulatory uncertainty. To be fair, blockchain and cryptocurrencies have rapidly developed even in the face of continuing uncertainty and ambiguity the globe over. On the other hand, however, this legal action taken by the SEC against (previously) on the most valuable cryptocurrencies in the world will inevitably give some potential investors pause.
A question that any prudent investor or business owner should ask is, what happens if other regulatory agencies dramatically change outlooks, and will current holders be negatively impacted as a result? Any industry requires investment, and by extension certainty, to grow and develop; blockchain and cryptoassets are no exception to this rule.
More widespread adoption. Regardless of whether or not a particular individual, regulator, or business owner is a advocate for blockchain and cryptocurrencies or not, the fact remains that the future of payments and financial markets is digital in nature. While many retail transactions may appear to already be digital, seamless, and instantaneous in, the reality is that credit card and other digital payments can still take days to finally settle out.
This might be old news to blockchain and crypto experts, but for the (much larger) percentage of the population that are not experts, this may come as a surprise. Benefits of cheaper, more efficient, and faster financial transactions are perhaps most obvious for financial markets, but the savings and benefits of lower transaction costs, paperwork, and delays have positive benefits for every economic sector.
Even better, as blockchain and cryptocurrencies become more widespread, use cases such as those in healthcare, logistics, and intellectual property will move forward, and deliver more visible and tangible benefits to broader swaths of the population.
More competitiveness. One of the stories that can fly under the radar whenever blockchain and cryptoassets are brought into the conversation is the simple fact that these technologies represent a competitive advantage to organizations and nations who adopt them. Adoption, however, will require increased clarity and specificity with regards to rules and legal frameworks surrounding blockchain and cryptoassets.
Taking a step back from financial markets for a moment, obtaining higher levels of transparency and traceability, while increasing the privacy of individual transactions, will increase the quality of data and information. The race among states, provinces, and even nations to attract and encourage investment in blockchain and cryptoasset organizations is no accident; the benefits of this technology will continue to accrue to early adopters.
Headlines are what attract attention, but oftentimes lead to more substantive questions and open items that should be addressed. The legal action filed by the SEC against Ripple is certainly something that will have to be closely watched over the coming months and years, but is also indicative of what impacts continued legal ambiguity are having on the sector.
Clear, consistent, and understandable rules are necessary, and these rules are increasingly going to need to be tailored to blockchain and cryptoassets moving forward. Rule-making is almost always messy, but it is an important part of the economic conversation.