The SEC did not disclose why it chose not to pursue its enforcement action against Garlinghouse and Larsen . Presumably , part of the SEC ' s rationale was its impatience to complete the trial court proceedings that have been pending for three years so it can appeal the court ' s summary judgment ruling . But another significant factor was undoubtedly the SEC ' s pessimism in securing a verdict against the executives .
As the court held on summary judgment , the only element of aiding and abetting that was seriously disputed by the individual defendants was their alleged knowledge that Ripple was violating federal securities laws . When the court denied the SEC ' s summary judgment motion , it held that a jury would need to determine that the executives knew , or recklessly disregarded , the facts that made Ripple ' s transactions and schemes illegal , including the fact that XRP was a security when sold to institutional buyers .
For their part , the executives denied any inkling that XRP was a security . They pointed to " the lack of any clear statutory or precedential requirement to treat XRP as a security ," as well as the SEC ' s " own belated ' guidance ' on this issue , which injected such confusion as to deny persons of ordinary intelligence any ' reasonable opportunity to know what is prohibited .'"
The executives also highlighted the SEC ' s eight-year delay in bringing an enforcement action against Ripple despite billions of dollars of transactions and the listing of XRP on more than 200 exchanges .[ 2 ]
The SEC was somewhat hamstrung in its response . Having affirmatively decided not to promulgate clearcut , universal regulations defining which cryptocurrencies qualified as securities under the Howey test — under the U . S . Supreme Court ' s 1946 decision in SEC v . W . J . Howey Co . — it struggled to demonstrate as a matter of law that Garlinghouse and Larsen could have made this determination themselves .
Due in part to the " SEC ' s failure to issue guidance on digital assets and its inconsistent statements and approaches to regulating the sale of digital assets as investment contracts ," the court permitted the executives to proceed to trial on their argument . The SEC , in dropping its case , evidently had little confidence it could convince a jury that the executives knew they were trafficking in unregistered securities .
What Comes Next ?
The SEC ' s aborted enforcement action against Garlinghouse and Larsen may have been good news for the blockchain executives , but what will the SEC ' s inability — or unwillingness — to establish clear regulatory guidelines mean for future enforcement actions ?
For its part , the SEC has shown no inclination toward rulemaking . Despite a writ of mandamus filed in April in the U . S . Court of Appeals for the Third Circuit by crypto exchange Coinbase Inc . seeking to force the SEC to commit to proposing new rules identifying which digital assets qualify as securities , the SEC has declined to move forward .
Six months after Coinbase ' s petition , the SEC has only reported that its staff has provided an internal recommendation on how to respond to Coinbase ' s request , without providing any details as to what the recommendation is or the timing of any decision .
It may be the case , however , that the SEC need not act .