A recent district court ruling stated that, in most instances, XRP is not a security. Specifically, XRP is not a security when traded on exchanges or when used to pay employees (defined as ‘programmatic retail sale’) but becomes one when sold directly to hedge funds, market makers, and other investors (which qualifies as an ‘institutional sale’). This judgment provides a bit of clarity on the application of the securities regime to crypto tokens and hopefully opens doors for crypto projects and exchanges to operate within more certain legal boundaries. For years, US-based crypto companies have faced uncertainty due to the lack of clear legislation. This decision, which is not binding and which could be appealed and eventually overruled, is, though, persuasive and may constitute a helpful reference for future rulings and laws, helping bring about a new legal regime in the United States.
At the same time, the European Union is also up to speed after passing the MiCA body of regulations last May. Despite representing an important milestone, there are mounting concerns that this regulation might already be outdated (it doesn’t cover NFTs, DeFi, or other central components of the blockchain industry) and challenging to implement in real-world scenarios.
The divergence in approach - whether allowing an industry to develop organically, assessing eventual problems, and implementing regulations to address them, or proactively establishing preemptive laws to regulate and shape the nascent industry - makes me wonder about the influence of the legal system (common law or civil law) on entrepreneurship and innovation.
Let's consider the common law, which offers flexibility, adaptability, and a strong emphasis on property rights. Entrepreneurs should thrive in this environment as rulings and laws based on real cases provide clear references. Nevertheless, the process of consolidating legal principles into clear laws often requires a significant amount of time, leaving entrepreneurs operating in a legal gray area for extended periods. This is exactly what happened to Coinbase, XRP, and many other projects in the crypto space. This state of ambiguity and uncertainty could discourage entrepreneurs and incentivize businesses to relocate to other jurisdictions, as Binance and FTX did.
On the other hand, civil law tends to generate comprehensive systems and is generally introduced at an earlier stage, setting boundaries early on and leaving companies and entrepreneurs the opportunity to plan accordingly. While this initial clarity may seem advantageous, the timing and extent of these regimes can potentially stifle innovation and suffocate emerging industries, especially when introduced prematurely, before a thorough understanding of their true potential has been reached. This could be the case for the EU’s bodies of laws and regulations on blockchain in May and AI in June.
More studies and evidence are needed to answer the question: is one legal regime more conducive to propelling innovation? In the meantime, it will be interesting to keep monitoring the development of different legal approaches and assess their impact on entrepreneurship, innovation, and growth of the crypto industry. By fostering an environment that combines regulatory clarity with adaptability and flexibility, governments can enable companies to thrive while safeguarding the interests of all stakeholders.