When longtime crypto firm Grayscale beat the SEC before the influential D.C. Circuit Court of Appeals last week, it was the industry’s most high-profile legal victory to date. The decision joins two other recent rulings that likely will pave the way for crypto to enter mainstream finance.
This should be a moment of celebration for Web3 enthusiasts—courts are clearing longstanding legal obstacles to blockchains adding billions of users—but this moment also could prove a crossroads in determining how those users come “on chain”—and whether that process will uphold the crypto community’s long-cherished value of decentralization and its benefits, or whether that ideal will be betrayed.
Let’s take a look at the court rulings themselves, including the recent Grayscale case, which challenged the SEC’s longstanding refusal to grant a spot Bitcoin ETF. While the decision does not command the SEC to approve the ETF, it makes an eventual approval almost a foregone conclusion (though the SEC delaying its decisions on all spot bitcoin ETFs after the Grayscale decision means it will not be immediate). One reason for this is that traditional financial institutions with whom the SEC is likely more comfortable—such as the largest money manager in the world, Blackrock—are also keen to get into the bitcoin-spot-ETF game. As my colleague Peter Fox observed, “[r]etail investors and institutions alike may be attached to bigger names,” and Grayscale might have unwittingly been doing Wall Street’s homework.
While the SEC could find ways to keep fighting over spot bitcoin ETF listings, the agency may see a silver lining in admitting defeat here, as that would guarantee the SEC some piece of the regulatory pie. One could even see a world in which spot ETFs for crypto tokens other than BTC and ETH proliferated. While that may be a big win for the institutions issuing and managing those funds, a world in which retail traders primarily access these tokens through such funds—rather than holding, trading, and using them directly through user-controlled digital wallets—would be a huge waste of potential, stifling innovative business models the technology enables.
The recent order in the Ripple case in the Southern District of New York represents another big symbolic victory for the industry after the scandals and market funk of the last year. I wrote about this at greater length earlier with my colleagues, but, for present purposes, the important thing to note is the order does not establish a precedent (or win the case for Ripple). So the order’s knock-on effects are likely limited, and while it does supply the industry with ample ammunition in the form of legal arguments to bolster various use cases and business models, the order’s real impact could be as fleeting as Terra scammer Do Kwon’s 15 minutes of fame.
Then there is the Uniswap case. Although not an SEC-related decision action, and the least high-profile of the three cases examined here, the recent dismissal of a class-action against Uniswap is likely to prove influential in the long term. The case itself involved claims by putative “investors” that Uniswap, its CEO, and its biggest venture capital backers were liable for scammy tokens sold by unknown actors who were using the firm’s decentralized protocol.
Showing a deft understanding of the function of the decentralized technology at issue, Judge Polk Failla of SDNY found, with respect to liability under the Exchange Act, that “third-party human intervention caused the harm, not the underlying platform.” Developers writing smart contracts are not entering into a legal contract with any user of such smart contract, she wrote, and so “it defies logic that a drafter of computer code underlying a particular software platform could be liable” for another person’s misuse of the platform.
That decision lets us observe a court that understands the technology, the gaps in the law, and the various arguments about how and why particular rules from the federal securities laws should—or should not—apply. The court also concedes that the state of industry regulation is in flux, but the best ammunition for the industry is language supporting the proposition that writing code underlying a smart contract does not a financial institution make. Not holding people liable for what bad actors do with their publicly published computer code is a good result.
This important victory may prove only pyrrhic, though, if important legal issues (e.g. token security status) are not resolved in a more comprehensive and systemic fashion. Disputes settled in court seldom make the best policy. And while Wall Street can bring liquidity, know-how, and legitimacy to crypto, entrepreneurs must be allowed to experiment with business models unlocked by the technology.
Otherwise, this mainstream moment will be a missed opportunity. Rather than a billion users holding and trading NFTs, yield farming through DeFi, and storing files on decentralized protocols like Filecoin, mainstream crypto could mean Wall Street offering financial products that integrate crypto, relegating blockchains to the backend. Rather than decentralized protocols empowering users through digital ownership, could Mainstream Crypto merely become the establishment usurping the entrepreneurs—Wall Street eating Silicon Valley’s breakfast? I hope not, but the actions of entrepreneurs, the courts, and policymakers in the near future will answer that question.
Damien G. Scott is an attorney at Scoolidge, Peters, Russotti & Fox LLP. He previously served as general counsel and COO of CoinList Ventures, and as chief compliance officer of another CoinList entity, one of the first broker-dealers approved by FINRA to conduct private placements of digital asset securities. The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.
