Coinbase, Other Exchanges Facing Dilemma on Delisting XRP

What happens when cryptocurrency once positioned as a regulator-friendly alternative to bitcoin gets heated by regulators? Exchanges trading XRP are about to find out.

Cryptocurrency exchanges in the United States must consider whether to handle XRP in light of a Securities and Exchange Commission (SEC) lawsuit claiming to be an unregistered security issued by Ripple Labs to raise funds.

Chief among these exchanges is Coinbase which, in addition to the usual XRP listing considerations, also seeks SEC approval to take its shares public and allow retail investors to trade them. If the SEC prevails in its lawsuit, XRP can be classified as a guarantee, meaning under US law entities that offer it for trading must register as securities exchanges.

It is also possible that an SEC victory could destroy the value of XRP, as the regulator wants to prevent Ripple from selling more tickets and for Ripple, CEO Brad Garlinghouse and chairman Chris Larsen to ignore their profits, pay prejudgment interest and pay civil penalties.

While some exchanges, market makers and funds have already started listing XRP or leaving positions and transactions with the cryptocurrency, it may not be a black-and-white question for larger exchanges.

Anthony Tu-Sekine, a partner at the law firm Seward & Kissel LLP, told CoinDesk that trading platforms like Coinbase are “between a rock and a hard place.”

“They can continue to list XRP based on their previous analysis that XRP is not security, in the hope that a court will find XRP not security,” he said. “Or they can take ‘remedial’ action such as limiting trading for wallets held by the people of the United States, or removing them from their exchange altogether.”

These scenarios are probably already covered by the exchanges’ terms of service policies, he said.

Exchanges like Coinbase would be “crazy not to consider” delisting, said Gabriel Shapiro, an attorney with Belcher, Smolen & Van Loo LLP. However, considering the question is not the same as delisting – or not delisting – the cryptocurrency.

“They have to think – not only from a business perspective but also legally – what kind of precedent they are setting,” he said. “If they delist one [cryptocurrency] just because a regulator accuses him of being a security, what happens next time that happens? Have you just given the SEC the right to disqualify anything from your platform just because they are making an accusation? ”

Providing digital assets on that basis may not be great for the exchange’s customers, Shapiro said.

“It’s not an easy decision for them just a delist, and personally if I did they don’t think I would be a delist unless I had something more concrete to point out,” he said.

A Coinbase spokeswoman declined to comment for this article.

What could happen

Coinbase in particular is uniquely positioned due to its impending IPO or direct listing. Confidentiality has already filed its S-1, a form that companies use to register their shares as securities. The SEC may provide the company with feedback on how it looks at potential risk factors or other aspects of its operations.

Last week, Shapiro told CoinDesk that this could include essentially forcing companies to take certain actions. While it notes that it does not believe the SEC would specifically tell Coinbase to consign XRP, the agency could say that not listing XRP could be a risk factor.

“You could say ‘in your risk factors you haven’t properly explained to your investors in your IPO how you’ve let XRP and others trade on Coinbase … You need to be really clear about that … including that we might come after you Coinbase, because you’ve been warned, ” he said.

Coinbase could then decide to deal XRP based on this feedback, or if the compliance burden is too much, it could even eliminate its IPO ambitions.

What Coinbase can’t do is pretend ignorance of how the SEC views XRP, Tu-Sekine said. The agency’s position is clear.

The SEC seems confident about its chances, and has useful precedents from its cases against Telegram and Kik, Shapiro said.

“I think we all doubt there would be a strong case but I don’t think we realized the extent to which Ripple entered into market-making agreements,” he said of the allegations in the SEC’s complaint.

Read our ongoing coverage of the SEC case against Ripple and its impact on the industry.