This Comment makes both an observation and an argument about the SEC v. Ripple Labs, Inc. litigation. First, this Comment observes that the facts of the case constitute a challenge to the lack of clarity surrounding the current regulatory regime governing blockchains and initial coin offerings (ICOs). Second, this Comment argues that the Ripple case provides regulators an opportunity to, if they choose, use complexity theory to address technological innovation—such as blockchain—as an emergent phenomenon in a complex system rather than as a binary policy choice to be either encouraged or discouraged.
Ripple, the U.S. company behind one of the world’s largest crypto assets by capitalization, deployed a blockchain network designed to remove the traditional friction points of intermediation and settlement from money transfer systems. To obtain widespread adoption of its crypto asset, XRP, both Ripple and its executives sold XRP to speculators and professional investors, but more than five years later—and following a rash of enforcement actions against other blockchain companies—the U.S. Security and Exchange Commission (SEC) brought Ripple and its executives into federal court for allegedly violating U.S. securities laws. The lawsuit is unique because it was not only brought against the company and personnel behind one of the most successful iterations of a novel technology, but effectively, it was brought against a widely held cryptocurrency at a time when pandemic- driven economic and social pressure and billions of dollars in main-street investment in new blockchain technologies was occurring in the wider U.S. economy.
But as important as the result of the case is, this Comment suggests that the long view of the case’s impact should be understood through the lens of complexity theory: regulators should, in cases of innovative technology, use this discipline to see the case as both an emergent phenomenon and a point in the trajectory of the larger U.S. economy where innovation and consumer protection are not binary, opposed considerations. To flesh this out, this Comment offers a broad, high-level overview informed by complexity science of the basic operation and recent history of blockchain technology and ICOs as well as the economic forces at work in the U.S. and an explanation of Ripple’s use case. This Comment then will turn to the regulatory history between the SEC and Ripple and analyze the merits of the investment contract approach necessary for SEC jurisdiction. Understanding the history, the parties, and the litigation as parts of a complex system, this Comment concludes by listing several expert suggestions regarding blockchain technologies consistent with obtaining short term stability that the court can take up in dealing with the facts of the case in the light of existing precedent.
Christian Smith-Bishop, A Ripple-Turned-Tidal Wave: SEC v. Ripple Labs as an Inflection Point in the Regulatory Approach to Innovation in Complex Systems, 44 Campbell L. Rev. 335 (2022).