After two years of fines, threats and lawsuits, Gary Gensler had crypto reeling. But a pair of recent legal setbacks have Wall Street’s top cop on the defensive.
The most stinging defeat for the Securities and Exchange Commission came on Tuesday when an appeals court overturned its decision to block Grayscale Investments LLC’s proposed spot Bitcoin exchange-traded fund. The ruling cracks open the door for a suite of products the regulator has deemed unsafe for retail investors.
The SEC may still appeal the ruling. “We are reviewing the court’s decision to determine next steps,” the agency said in a statement.
The regulator is already fighting another lower-court ruling over sales of Ripple’s XRP token, which risks undercutting some of the agency’s jurisdiction over crypto.
Meanwhile, the SEC is still moving ahead with a series of high-profile enforcement actions, including against Coinbase Global Inc. and Binance Holdings Ltd. The recent losses, however, represent a dramatic turn and crypto advocates are pouncing.
“The rulings show the courts will not blindly accept the SEC’s conclusions on the application of securities laws to crypto,” said Coy Garrison, a former counsel to SEC Commissioner Hester Peirce, who is the most crypto-friendly member of the panel. “The courts, not the SEC, have final say,” said Garrison, who now works at the law firm Steptoe & Johnson.
The SEC has said it’s reviewing the court’s decision on Grayscale. Agency lawyers have 45 days to ask a full slate of judges on the DC Circuit Court of Appeals to reconsider what the three-judge panel decided on Tuesday. It could also petition the US Supreme Court to take up the case.
Regardless of the path, the agency will have to justify its decisions in a way that it hasn’t previously.
In the court’s Tuesday decision, Judge Neomi Rao, said “the denial of Grayscale’s proposal was arbitrary and capricious because the commission failed to explain its different treatment of similar products.”
Under Gensler, the SEC has claimed many crypto products should be registered with the agency. On Monday, the regulator settled its first case over nonfungible tokens.
The SEC chief has consistently justified the stance as necessary to protect investors from an industry that he says is rife with fraud.
Critics, including lawyers who represent crypto clients, have argued that the SEC has overstepped under Gensler. Already some are casting Tuesday’s Grayscale ruling as supportive of that view.
“It sends a message to those in the digital-assets industry that for those who have the appetite and resources to challenge the SEC, there are opportunities for successful challenges,” said Daniel Tramel Stabile, partner at Winston & Strawn. “It represents another check on the SEC which sends us a signal that its authority in the space is not unbridled.”