SEC's Gensler both 'pleased' and 'disappointed' by Ripple crypto ruling

Securities and Exchange Commission Chair Gary Gensler said Monday that his agency is both pleased and disappointed with a court ruling that Ripple Labs's XRP token was not necessarily a security but implied that crypto exchanges aren’t off the hook for complying with SEC regulations.

"There’s ongoing litigation with a number of these crypto platforms and these platforms are commingling a number of services that you’ve seen on these crypto platforms where they could well be trading against their customers, bundling up a bunch of services that we would not allow in any other parts of our capital markets," Gensler told Yahoo Finance in an exclusive interview.

FILE - U.S. Securities and Exchange Commission Chairman Gary Gensler testifies during a House Financial Services Committee hearing on oversight of the SEC, April 18, 2023, on Capitol Hill in Washington. Two lawsuits filed by the U.S. Securities and Exchange Commission against the world’s biggest cryptocurrency exchanges, Binance and Coinbase, have reopened tensions between the government and a volatile industry that has been marred by scandals and market meltdowns. (AP Photo/Jacquelyn Martin, File)
Securities and Exchange Commission Chairman Gary Gensler. (AP Photo/Jacquelyn Martin, File) (ASSOCIATED PRESS)

The interview was his first since a judge ruled last Thursday that the XRP token issued by Ripple was a security when sold to institutional investors but not to the general public. The SEC sued Ripple in 2020, alleging that the sale of XRP was an unregistered securities offering.

The judge's reasoning was that the institutional investors "would have purchased XRP with the expectation that they would derive profits from Ripple’s efforts."

Gensler says the agency is "pleased" with the part of the decision ruling that the token was a security when sold to institutional investors but "disappointed in other aspects about retail investors."

"In terms of the decision," he added, "we’re still taking a look at it."

The risks of AI

Gensler also warned Monday about the risks posed by artificial intelligence, noting that a limited number of companies control much of that technology. If one of them were to run into trouble, that could threaten the stability of the financial system.

"AI may heighten financial fragility as it could promote herding with individual actors making similar decisions because they are getting the same signal from a base model or data aggregator," he said. "It also could exacerbate the inherent network interconnectedness of the global financial system."

Gensler said many of the challenges to financial stability that AI may pose in the future will require new thinking on regulatory interventions. He said risk management guidance will need updating and won’t be enough in its current form.

"It’s quite possible that a financial crisis of the late 2020s or the 2030s, the after-action report will say, we didn’t know everyone was relying on the same base or foundation model for their mortgage information or their stock market information," he said.

Gensler says the AI models are hard to explain and complex and that there needs to be a serious conversation among financial regulators around the globe due to the growing reliance on the models and their integration with global capital markets.

Crypto crackdown

Gensler is leading a wide-ranging legal campaign to crack down on the cryptocurrency industry. Since the beginning of 2023, the SEC has charged 15 different crypto actors with violating securities laws.

That includes lawsuits against Coinbase (COIN), the largest crypto exchange in the US, and Binance, the world's largest digital currency exchange.

In both cases, the SEC alleged the exchanges violated securities law by allowing certain digital currencies to be traded on their platforms.

Key to the SEC's case is its argument that certain cryptocurrencies are securities and therefore should be regulated by Washington.

The Ripple ruling last week was hailed within the crypto world as a victory over the SEC.

A number of digital currencies surged on the news, including bitcoin (BTC-USD), which reached its highest levels since May 2022.

The stock of Coinbase also jumped late last week; the exchange was quick to say that it would restart the trading of XRP on its platform.

"We've carefully reviewed our analysis," Coinbase chief legal officer Paul Grewal wrote on Twitter. "It's time to relist."

Some observers said the decision was not a clear victory for Ripple.

"I view it as a split decision," said Berenberg Capital Markets analyst Mark Palmer, who predicts the SEC will appeal the ruling and that the case will ultimately land before the Supreme Court.

"This is round one, and it's inconclusive."

In fact, Judge Analisa Torres wrote in a footnote of her Ripple ruling that she could not make a ruling on secondary sales of XRP that take place on exchanges "because that question is not properly before the Court."

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