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Policy


THIS WEEK IN POLICY (7/17)

MOHAMMAD HAMDY

Jul 17, 2023 5 min

Hello Fintech Friends,

Welcome to another week of fintech policy updates. Last week brought forth a
highly anticipated decision in the case of Securities and Exchange Commission
(SEC) v. Ripple. The outcome of this case has been eagerly awaited by the entire
crypto community since its initiation in 2020. Alongside this significant
development, we have updates on the latest news in crypto regulation and central
bank digital currencies (CBDCs). Additionally, we are delighted to present Part
III of a four-part contribution on open banking by our esteemed friend Phil
Chang from Method Financial.

As always, if you are not yet subscribed to the Policy Edition of This Week in
Fintech, make sure to subscribe below! Additionally, if you are interested in
contributing to the Policy Edition as a guest writer to cover ongoing events or
dive deep into fintech policy issues, please feel free to reach out to me on
Twitter or LinkedIn.

Subscribe to TWIF Policy

1. Enforcement

Last Thursday, Judge Analisa Torres in the U.S. District Court for Southern New
York finally rendered a decision in the highly-anticipated case of SEC v.
Ripple. The decision has been met with varied interpretations, some view it as a
clear victory for Ripple and the crypto community, while others see it as a
split decision that gave each party a part of what they wanted. What did the
decision actually say? And what does it mean for the future of crypto?

For context, the SEC initially filed the lawsuit in December 2020 under Jay
Clayton, the former Chair of the SEC and predecessor of Gary Gensler, alleging
that Ripple and its co-founders, Brad Garlinghouse and Chris Larsen, raised
$1.3B through the sale of an unregistered security (Ripple's XRP token). At the
heart of the case was the following question: Is XRP a security? Rather than
settling, Ripple chose to proceed to court, leading to a protracted legal battle
that cost Ripple nearly $200M in legal fees. Fast forward to July 13, 2023,
Judge Torres delivered the following rulings:

(a) the sale of $728M worth of XRP to institutional investors is considered a
sale of unregistered securities, for which Garlinghouse and Larsen will face
trial before a jury for their alleged violations;

(b) the sale of $757M worth of XRP to retail investors (1% of total sales)
through programmatic sales (i.e., sales that involve blind bid/ask transactions
conducted via algorithms where purchasers are unaware of the sellers'
identities) is not a sale of unregistered securities and, thus, does not violate
U.S. securities law; and

(c) the sale of XRP in secondary markets, which constitutes 99% of XRP sales,
was deemed outside the scope of the lawsuit and, as a result, was completely
left out of the decision.

The long-term ramifications of this decision will depend on potential appeals to
the Second Circuit by either party and the subsequent outcomes of those appeals.
The Second Circuit can either uphold or overturn Judge Torres's decision, in
whole or in part. Assuming no reversals occur, a significant shift lies ahead
for crypto issuers. They will be obligated to comply with U.S. securities law if
they intend to sell crypto to institutional investors. However, no such
obligation will exist if they choose to sell crypto to retail investors through
programmatic sales. This raises intriguing questions: Will we witness market
segmentation between issuers targeting institutional investors and those
specializing in programmatic sales? And would the non-programmatic sale of
crypto to retail investors, which the decision is silent about, be considered a
sale of securities or not? The answers to these pivotal questions are yet to
come. Generally, it is important to note that court decisions, like the recent
Ripple decision, provide certain answers. However, achieving the desired level
of clarity the industry is hoping for will likely necessitate a legislative
intervention by Congress to establish definitive rules for the industry’s path
forward.

In other enforcement news, last Thursday, the Department of Justice filed seven
criminal charges against former CEO of bankrupt crypto lender Celsius Network,
Alex Mashinsky. The charges include securities fraud, commodities fraud, wire
fraud (two counts), conspiracy to manipulate the price of the Celsius native
token CEL, fraudulent scheme to manipulate the price of CEL, and market
manipulation of CEL. Simultaneously, the Federal Trade Commission (FTC) reached
a settlement with Celsius, resulting in a $4.7B fine. The fine stems from
Celsius providing depositors with false assurances about their ability to
withdraw deposits at any time and misrepresenting the risks associated with
Celsius’ lending activities. Adding to the mix, the SEC filed a lawsuit against
Celsius for conducting an unregistered offer and sale of crypto asset securities
through its lending program. Similarly, the Commodity Futures Trading Commission
(CFTC) took action against Celsius for acting as an unregistered commodity pool
operator (CPO).

2. Crypto Regulation

In our crypto regulation updates for this week, the Senate Finance Committee is
seeking input from the crypto industry regarding the taxation of
cryptocurrencies until September 8, 2023. In South Korea, the Financial Services
Commission has introduced new regulations that will require crypto companies,
starting in 2024, to provide detailed information about the sale of crypto
currency, including quantity, properties, operational strategies, and accounting
practices. Additionally, companies that own or issue crypto will be obligated to
disclose their cryptocurrency holdings in their financial statements.

3. CBDCs

U.S. Presidential Candidate Ron DeSantis has made a strong declaration, stating
his intention to ban CBDCs "On Day One" if elected. Meanwhile, the results of
the Bank for International Settlements (BIS) 2022 survey on CBDCs reveals that
emerging markets and developing economies have made greater strides in their
CBDC initiatives compared to advanced economies.

4. Open Banking (from our guest contributor, Phil Chang, General Counsel of
Method Financial)

Open banking promises to open access to competitive financial products and
services for millions of unbanked and underbanked who don’t have asset accounts
at banks or credit unions, and who rely on non-traditional, high-interest
products for liquidity to meet pressing needs.

Perhaps the greatest gains to financial inclusion offered by open banking comes
from improved credit modeling. Because creditworthiness is largely determined by
a credit report and score, those with a thin or no credit file are frequently
denied credit. By making financial data like cash flow, direct deposits,
unreported liabilities, and broader payment behavior more readily accessible,
open banking gives issuers and lenders the ability to build a financial profile
for the unbanked and underbanked.

Reduced transaction costs through open banking across all use cases will likely
also prove to be a significant driver of financial inclusion. For example, even
if credit modeling commonly ingested alternative data in lieu of credit history,
without open banking, those poised to benefit likely would not due to lack of
time and resources to manually gather that data.

But for open banking to achieve meaningful gains in financial inclusion, it must
truly be open by minimizing costs and barriers of compliance and entry—without
sacrificing privacy and security.

Join me in conversation on Twitter or LinkedIn or leave a comment below.

See you next week!

READ NEXT


THIS WEEK IN POLICY (8/18)

Hello Fintech Friends, Welcome to another exciting week of fintech policy
updates! This week, we delve into the latest developments in crypto regulation,
browse the most important enforcement news, and continue our coverage of
fintech-related artificial intelligence (AI) developments.   As always, if you
are not yet subscribed to the Policy
Mohammad Hamdy Aug 18, 2023


THIS WEEK IN POLICY (8/9)

Hello Fintech Friends, Welcome to another exciting edition of our fintech policy
updates. This week, we delve into a wide range of fintech policy topics; from
the ever-evolving world of crypto regulation to the nuances of enforcement
actions. We also cover the most recent updates on central bank digital
currencies
Mohammad Hamdy Aug 9, 2023


THIS WEEK IN POLICY (8/1)

Hello Fintech Friends, Welcome to another week of fintech policy updates! Last
week brought major developments in crypto regulation, with the U.S. House
Committee on Financial Services approving four crypto bills. We delve into what
this means for the industry and discuss other crypto regulation updates both in
the
Mohammad Hamdy Aug 1, 2023

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