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A lawyer representing Ripple in its lawsuit against the US Securities and Exchange Commission (SEC) predicts that the regulator will soon be targeting crypto exchanges, according to a recent tweet.
John Deaton, counsel for Ripple (XRP), has been extremely vocal on Twitter about the ongoing lawsuit between the SEC and Ripple Labs. As the lawsuit seems to be reaching its (hopeful) conclusion, defendants to the case are attempting to move forward with summary judgment on whether XRP is a security and whether the fair notice defense is viable.
However, the SEC has been very proactive in keeping discovery alive, causing more delays and sparking some of the harshest communications seen to date in a lawsuit of this magnitude.
Deaton’s tweet came quickly after after the SEC proposed new rules requiring platforms to include the fair value of digital assets they hold for users on their balance sheets.
Why crypto exchanges could be next?
Deaton claims that this is the first step in a move by the regulator to file cases against these exchanges, and we may see cases as soon as this summer.
The recent advisory issued by the commission appears to affect crypto exchanges, DeFi platforms, and custodial service providers in general. However, the advisory opinion has failed to provide the much-needed clarity expected of it by the community.
Instead, the proposed rules further add to the already complex and vague regulatory framework guarding the space. In the advisory, the SEC pointed out several risks associated with protecting crypto assets and cited a 2020 report on stolen assets from crypto platforms in 2018.
However, the regulator also admitted that it has refused to provide regulatory clarity, despite several calls over the years. Back in January, SEC Chair Gary Gensler stated that the regulator would examine changes more closely in 2022.
Will the SEC exceed its scope?
While this admission might be the first step in a move to create a regulatory framework, there are fears that the watchdog will extend the scope of its authority.
Recent hacks in the crypto industry have informed these new regulatory guidelines that aligns with the statements Gensler has previously communicated, including users buying crypto on Coinbase who have made unsecured loans to the company.
With the new guidelines, all digital assets owned by investors on a platform would be considered assets of the platform. This will mostly affect the balance sheet of the companies and put them under SEC control.
Last year, Coinbase reported $21.3 billion in assets and liabilities on its balance sheet; far below $278 billion worth of digital assets it held at that time. Per SEC registration requirements, any company with more than $50 million in assets immediately falls under SEC purview.
Thus, liquidity providers and automated market makers might have no choice but to register under the SEC if digital assets are added to their balance sheet. There are still other proposals, such as including crypto market participants, especially in the definition of Dealers or Government Securities Dealer.
Ultimately, this means they’ll have to register with the SEC and abide by federal securities laws and regulatory obligations.
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