The approach of the Securities Exchange Commission and its enforcement of crypto regulation by threat and lawsuit is definitely all over the headlines, but the settlements being forced are not the biggest concern, legally speaking. In reality, the problem that will shape the industry and crypto markets for years to come are the court cases that actually make it to trial and become case law.

Legal Precedent

The principle of legal precedent dates back to Anglo times, and it's a very simple concept. Where a court decision has already been made, subsequent court cases should follow the same pattern unless there is a very good argument to do different. While this seems easy, in fact precedent has a very powerful influence on judges after the initial case is set and decided. Judges would much prefer to refine and add to the logic of an earlier case than overturn it altogether or decide in conflict, forcing the issue to go to appeal. So, as a result, the first cases influencing crypto start to set down law on how crypto should be treated going forward. And that becomes law just as much as what Congress or legislative body in another country might enact.

Regulatory Clarity

Lawsuits can also break the impasse created by regulations. At most, regulations are administrative rules, created by a government agency given authority to regulate. However, their power is not absolute. A court can easily trump them, rewrite regulations, or outright nullify them. In this regard, the last thing a regulator wants is to end up in a trial with a high risk of losing. Many will sue, hoping that their targets fold, being too weak to support a sustained legal fight. The strategy backfires, however, when a target fights back and wants to go all the way to trial. This seems to be the case with the SEC vs. Ripple.

Investor Protection

Traditionally, lawsuits in financial markets are frequently intended to protect consumers and investors. However, if it's decentralized in nature, there's no primary target to go after in crypto. So, instead, parties end up focusing the players that make it possible to access crypto, exchanges. While some have clearly proven they need to be sued, such as FTX for example, others are caught up in the fray, just because. Eventually, the lawsuit frenzy ends up creating a lot of collateral damage and unnecessary victims, and what's left oftentimes becomes the monopoly in charge of most of the market, the last thing anyone sane wants.

The scariest thing about lawsuits in the crypto field is that there is no effective way to stop them. Once lawyers smell a profitable path, the trend picks up steam, and it can be dramatic in the change instituted by court decisions, as well as far-reaching. Unfortunately, everyone else ends up living with the results, whether we all like it or not.