Coinbase, Other Big Exchanges ‘Between Rock and a Hard Place’ on Delisting XRP

What happens when a cryptocurrency once positioned as a regulator-friendly alternative to bitcoin gets heat from regulators? Exchanges that trade XRP are about to find out.

U.S.-based cryptocurrency exchanges have to consider whether to delist XRP in light of a Securities and Exchange Commission (SEC) lawsuit alleging it is an unregistered security issued by Ripple Labs to raise funds. 

Chief among these exchanges is Coinbase, which, in addition to the normal considerations around listing XRP, is also seeking SEC approval to take its shares public and allow retail investors to trade them. If the SEC prevails in its lawsuit, XRP may be classified as a security, meaning under U.S. law entities offering it for trading must register as securities exchanges. 

It’s also possible an SEC victory would destroy XRP’s value because the regulator wants to prevent Ripple from selling any more tokens, and for Ripple, CEO Brad Garlinghouse and Chairman Chris Larsen to disgorge their profits, pay prejudgement interest and pay civil penalties. 

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

Anthony Tu-Sekine, a partner at 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 a security, with the hope that a court will find that XRP is not a security,” he said. “Or they can take ‘remedial’ actions such as restricting trading for wallets held by U.S. persons, or take it off their exchange altogether.”

These scenarios are likely 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. Considering the question isn’t the same as actually delisting – or not delisting – the cryptocurrency, however. 

“They have to think – including just from a business perspective but also legal – what kind of precedent they’re setting,” he said. “If they delist one [cryptocurrency] just because a regulator accuses it of being a security, what happens the next time that happens? Have you just given the SEC the right to delist anything from your platform just because [it makes] an accusation?”

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

“It’s not an easy decision for [Coinbase] to just delist and, personally, if I were them I don’t think I would delist unless I had something more concrete to point to,” he said. 

A Coinbase spokesperson declined to comment for this article.

XRP price has tanked on news of the SEC case against Ripple

Source: CoinDesk

What might happen

Coinbase in particular is in a unique position due to its impending initial public offering (IPO) or direct listing. It has already confidentiality filed its S-1, a form companies use to register their shares as securities. The SEC can provide feedback to the company about how it views 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 noting he does not believe the SEC would explicitly tell Coinbase to delist XRP, the agency could say that not delisting XRP might be a risk factor.

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

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

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

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

“I think we all suspected there’d 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’s case against Ripple and its impact on the industry.

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