Ripple Settlement Offers Hope For Better Regulatory Future
J.W. Verret
This op-ed originally published in Law360 (April 14, 2025, 2:56 PM EDT) --
J.W. Verret
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Four years ago, I wrote that the U.S. Securities and Exchange Commission's approach to cryptocurrency regulation was "haphazard and inconsistent." I argued that the agency's decision to wait eight years before filing a complaint against Ripple Labs in December 2020 was irresponsible, and that the SEC needed to provide more clarity about when and how cryptocurrencies would be regulated.
In the waning days of Chair Jay Clayton's tenure, the commission, in SEC v. Ripple in the U.S. District Court for the Southern District of New York, brought its first major action against developers of a blockchain token alleging the unregistered sales of a security. This started a chain reaction of dozens of such cases during Chair Gary Gensler's tenure alleging the unregistered sales of securities against crypto developers in actions where no fraud occurred and where no pathway to registration was even available.
The March 25 settlement agreement between the SEC and Ripple — in which the agency agreed to return $75 million of a $125 million fine and drop its appeal of U.S. District Judge Analisa Torres' July 2023 ruling — vindicates those criticisms and highlights the urgent need for a complete overhaul of cryptocurrency regulation at the SEC.
The SEC's enforcement-first approach was always flawed.
The SEC's retreat in the Ripple case represents a tacit acknowledgment of what many in the cryptocurrency industry have long argued: The agency's enforcement-first approach, without clear rulemaking or guidance, was fundamentally flawed.
Throughout both the Clayton and Gensler eras, the SEC steadfastly refused to provide regulatory clarity to the cryptocurrency market. Instead, the agency relied on a patchwork of enforcement actions that left founders and investors to read the tea leaves of complaints and settlements, trying to make educated guesses about why the SEC chose to charge one cryptocurrency founder but not another.
This approach created an environment of regulatory uncertainty that stifled innovation while failing to provide meaningful investor protection. The SEC's handling of the Ripple case exemplifies this failure.
A better way is possible — and is already happening.
What makes the SEC's past approach all the more inexcusable is that we now see a better path forward. Remarkably, two commissioners, prior to the confirmation of Chair Paul Atkins on April 9, demonstrated what responsible cryptocurrency regulation looks like.
Commissioners Hester Peirce and Mark Uyeda, the latter of whom was then-acting chair, organized roundtables, solicited public comments, held stakeholder meetings and established a task force — all while waiting for a new chair to be confirmed. This collaborative, transparent approach is precisely what the Clayton-era SEC should have done and what the Gensler SEC never considered.
The stark contrast between the current commission's thoughtful engagement with the cryptocurrency industry and the previous enforcement-first approach underscores how much time and resources have been wasted pursuing ill-conceived litigation like the Ripple case.
The Ripple case showcased enforcement overreach.
The Ripple case will likely be remembered as a low point for SEC enforcement. The SEC's initial demand for nearly $2 billion in civil penalties, disgorgement and prejudgment interest was not only disproportionate but appeared retributive — seemingly in response to Ripple's courageous decision to fight back against the agency rather than settle.
It is fundamentally un-American that a company that defrauded and harmed no one should be required to pay hundreds of millions of dollars in penalties. The SEC's pursuit of excessive disgorgement also blatantly ignored the U.S. Supreme Court's 2020 ruling in Liu v. SEC, which significantly curtailed the agency's disgorgement power by limiting it to a defendant's net profits from wrongdoing.
Liu requires linking securities law precedent to accounting concepts like revenue recognition, expense allocation and netting principles when calculating disgorgement.[1] The SEC's disregard for these principles in its Ripple litigation suggests either a troubling ignorance of Supreme Court precedent or a willful attempt to circumvent it.
The real victims were XRP holders.
Perhaps the most tragic aspect of the Ripple saga is that while the SEC claimed to be protecting investors, its actions caused substantial harm to the very people it purports to protect. When the SEC filed its complaint against Ripple, the price of XRP plummeted, costing token holders millions of dollars in losses.
These investors — many of whom were ordinary individuals who had purchased XRP in good faith — suffered real financial harm not because of any action by Ripple, but because of the SEC's decision to bring this case in the first place. The irony is palpable: In its zeal to protect investors, the SEC inflicted significant damage on them.
What's the path forward?
The tentative settlement between Ripple and the SEC, with the agency returning 60% of the fine it collected, represents more than just the resolution of a single case. It signals the beginning of a necessary recalibration of the SEC's approach to cryptocurrency regulation.
The current commission's more collaborative approach offers hope that we may finally see the regulatory clarity and consistency that markets crave. This would involve developing a more precise test for determining when cryptocurrencies constitute securities, one that recognizes the evolutionary nature of decentralized digital assets.
The SEC could, for instance, elaborate on the level and type of founder involvement that will deem a cryptocurrency a security, give recognition to cryptocurrencies previously classified as currencies by the U.S. Department of the Treasury, or implement Peirce's proposed safe harbor that would give cryptocurrencies time to become decentralized.
Whatever specific approach the SEC ultimately adopts, it must be guided by principles of regulatory consistency, transparency and proportionality. The days of regulation by enforcement action must end.
Conclusion
The Ripple case stands as a stark reminder of the costs of regulatory overreach and the importance of clear, consistent rules. As I wrote four years ago, "regulatory consistency and the rule of law deserve a better way." The SEC's retreat in this case suggests that, perhaps, we may finally get one.
For cryptocurrency founders and investors who have long operated in a climate of uncertainty, the resolution of the Ripple case offers a glimmer of hope that a more rational regulatory approach may be on the horizon. It's long overdue.
J.W. Verret is an associate professor at George Mason University's Antonin Scalia Law School.