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.

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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.

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See you next week!