RE <<SEC to save us>>
FWIW, why the SEC vs Ripple case matters, up or down, especially for coins that smell like a security that pays 'inflation'. Gary Gensler is trying to apply laws from the 1930s to assets of the 2000s. I am bullish, for either the SEC shall be crushed, or SEC crush most but not all coins, and CSPR shall be amongst the not-all. CSPR is utility to work for and on behalf of enterprises. We either win by generalise ramp, or by loading at hiccup and move forward without SEC-bothered domain.
by www.btig.com
Digital Assets
Outlook 2022: SEC v. Ripple Case Looms Large, With Crypto Regulation in Balance; Cross-Metaverse Transfer of In-Game Assets Poised to
Bolster Blockchain-Enabled Games; Staking to Drive Upside Surprises?
WHAT YOU SHOULD KNOW: While 2021 was a whirlwind in the Digital Asset space, with huge swings in sentiment driving price volatility in cryptocurrencies, and nonfungible tokens (NFTs) and blockchain-enabled metaverse games having entered the public consciousness, we believe 2022 is poised to be a year just as eventful for the still-nascent industry, if not more so. In this 2022 preview, we focus on three themes we view as likely to command a significant amount of investor attention during the coming year, and we discuss how these themes are likely to impact stocks within BTIG’s Digital Asset coverage universe.
These three themes are: (1) the efforts to establish clarity around regulation of the Digital Asset space, with the outcome of the SEC v. Ripple case likely to impact
the future course of the SEC's regulatory efforts, (2) the increasing prevalence and adoption of blockchain-enabled metaverse games, which is likely to be accelerated
by initiatives aimed at establishing interoperability between virtual worlds, and (3) the ongoing efforts of digital asset exchanges and other platforms to build out
comprehensive offerings, with staking representing a potential source of upside surprises for such firms.
Theme 1: SEC v. Ripple Outcome Likely to Impact Future Course of Crypto Regulation
¦ Our views regarding how regulation of the Digital Asset space is likely to play out in the coming year are very much aligned with those outlined by Isaac Boltansky, BTIG’s Director of Policy Research, in his 2022 preview report. In particular, we believe the SEC under the leadership of Commissioner Gary Gensler will continue to engage in “regulation by enforcement” despite the pleadings of his fellow SEC Commissioners, Hester Peirce and Elad Roisman, to abandon that approach in favor of clear regulatory guidance.
¦ We also are aligned with Boltansky's view that the SEC is unlikely to approve a physically backed bitcoin ETF during 2022, as the bitcoin futures ETFs approved by the agency were much easier for Gensler to support inasmuch as the underlying driver of the funds is a regulated futures exchange.
¦ While the political polarization currently seen on Capitol Hill makes the likelihood of Congress providing clarity around the regulation of digital assets an iffy proposition at best, we believe there is another significant reason why more comprehensive regulatory initiatives are unlikely to emerge, particularly as far as the SEC is concerned, in the near term: the ongoing case of SEC v. Ripple. The outcome of that case could have a game-changing impact on how the space is regulated going forward, in our view.
¦ What began last December as a case focused on the question of whether Ripple’s blockchain-based, cross-border payments network was a centralized entity, and whether its native token, XRP, is a security, has evolved into one in which larger issues have arisen that have the potential impact the SEC’s ability to regulate the Digital Assets space.
¦ In particular, we believe an adverse outcome for the SEC in its case against Ripple likely would hinder the agency's ability to follow through on the regulatory actions implied by Gensler’s Congressional testimony in October, during which he stated that “most” of the 5,000 to 6,000 existing cryptocurrencies fall under the definition of a security, and are thus subject to regulation by the SEC.
¦ Gensler has continued to assert that there is already clarity around the rules for regulating cryptocurrencies, and that the SEC clearly has jurisdiction over the space, when many industry participants have questioned those claims while noting that an acute absence of regulatory clarity has hampered their ability to make decisions about the future. We believe Gensler simply cannot acknowledge the absence of clear rules around the space without providing ammunition to Ripple’s counsel for its defense of the platform.
¦ We note that Ripple has raised two defenses in SEC v. Ripple. The first is straightforward: that XRP is not a security. The second, which we view as potentially creating a precedent that could impact much of the crypto industry if it succeeds, is its fair notice defense. This defense focuses on whether Ripple had reasonable fair notice from the SEC regarding whether its sales of XRP tokens constituted illegal sales of securities.
¦ The SEC’s counsel has argued before the court that Ripple had received fair notice, asserting that the more than 70 enforcement actions that the agency had brought against crypto firms during the years leading up to the filing of its lawsuit against Ripple had put the project’s leadership on notice that XRP was a security. The agency’s attorneys also asserted that fair notice did not require “exact factual correspondence.”
¦ We observe that SEC Commissioners Peirce and Roisman in a statement posted to the agency’s website on July 14 took exception to its “clue-by-enforcement approach,” as well as to the notion that crypto industry participants should have to infer from regulatory actions aimed at other crypto projects how those actions related to their own circumstances.
¦ Peirce and Roisman stated that, in the absence of the clarity that Commission-level statements would bring to the crypto space, “litigated and settled Commission enforcement actions have become the go-to source of guidance. People can study the specifics of token offerings that become the subject of enforcement actions and take clues from particular cases; however, applying those clues to the facts of a completely different token offering does not necessarily produce clear answers.”
¦ Viewed through the lens of the SEC v. Ripple case, the fact that Gensler has been making affirmative statements regarding the clarity of rules for the crypto space is easier to understand, as is the enforcement action-driven approach he has taken to regulating it. At the same time, we believe Gensler’s statements regarding what he describes as the SEC’s clear authority over cryptocurrencies are inconsistent with his requests to Congress to provide him with more powers to regulate the industry. Moreover, we have noted that those arguing that it is the CFTC that has jurisdiction over cryptocurrencies can point to two federal court rulings issued during 2018 that supported their view.
¦ One of the implications of a court decision in favor of Ripple based on its fair notice defense was actually spelled out by the SEC’s counsel during arguments in court, as they stated that such an outcome would nullify the Howie Test that has been used by the agency to determine whether a cryptocurrency was a security or not. We believe such a decision would create a precedent that would turn any lawsuit brought by the SEC against a crypto project into an uphill battle, and it would severely constrain Gensler’s ability to follow through on his promised regulatory initiatives aimed at the space.
¦ In such a scenario, we believe Gensler likely would turn to his best remaining option: to embrace the approach described in the Token Safe Harbor Proposal 2.0 that Peirce posted on the SEC website in April. The proposal would provide crypto projects with a three-year grace period during which they could evolve their projects toward decentralized models, after which they would need to assess whether they had achieved compliance with securities laws or whether their tokens still met the definition of a security.
¦ While we believe the range of crypto-related regulatory initiatives launched by Gensler will be limited while the outcome of SEC v. Ripple is still pending, we also believe the resulting lack of action to bring additional regulatory clarity to the space could slow the pace of adoption of digital assets by institutional investors. Digital Assets is a unique asset class insofar as its adoption has been led by retail rather than institutional investors. With that said, we view institutional adoption as critical to the growth of the space.
¦ We have seen institutional investors ranging from large mutual fund complexes to multi-strategy hedge funds build trading and back-office infrastructure in anticipation of their increased participation in the digital asset space, and we have observed such firms aggressively gaining exposure to the space through venture capital funding rounds. However, we believe the potential for the SEC to focus one of its enforcement actions on one of the crypto projects in which they would potentially invest is likely to cause institutional investors to approach their efforts in a more deliberate and focused manner during the next few months.
¦ With that said, the SEC’s blessing of several bitcoin futures ETFs has made the agency’s stance that bitcoin is not a security even more clear. This incremental clarity should support additional investment by institutional investors in bitcoin and the projects and stocks whose prospects are driven by the cryptocurrency. One of these stocks is MicroStrategy (MSTR, Buy, $950 PT), the price of which is highly correlated to the price of bitcoin due to its holdings of ~121,044 bitcoins as of November 29 which currently have a market value of ~$6.9bn.
Theme 2: Advent of Metaverse Interoperability Poised to Spur Further Adoption of Blockchain-Enabled Games
¦ The announcement by Mark Zuckerberg on October 28 that Facebook had adopted a “metaverse-first” strategy and had rebranded itself as Meta Platforms (FB, Not Rated) had a remarkably positive impact on the prices of the native tokens of blockchain-based metaverse games such as Decentraland and The Sandbox. During the weeks following Zuckerberg’s announcement, thousands of articles were written about the metaverse, drawing attention to the fact that virtual worlds were not just a fantasy concept depicted in films like Ready Player One and sci-fi novels such as Snow Crash, but were already in existence and growing, with many more in development.
... etc etc
 |
