- The SEC has reignited a legal battle by appealing a pivotal court ruling.
- Key transactions face fresh scrutiny, raising market stakes.
- Fundamental legal tests are reinterpreted, unsettling the industry.
The U.S. Securities and Exchange Commission (SEC) has officially filed a notice of appeal against the court’s ruling in its case against Ripple Labs. The regulator is challenging Judge Analisa Torres’s decision from July 2023, which delivered a mixed outcome for both parties involved.
In December 2020, the SEC filed a lawsuit against Ripple Labs and its two top executives, Bradley Garlinghouse and Christian A. Larsen . The agency alleged that Ripple had conducted unregistered securities offerings by selling XRP tokens, violating Section 5 of the Securities Act 1933.
SEC’s Reasoning for the Appeal
The SEC also accused Garlinghouse and Larsen of aiding and abetting these violations. After both parties filed summary judgment motions, Judge Torres ruled in July 2023. The court granted the SEC’s motion concerning Ripple’s Institutional Sales but denied it on other points.
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Conversely, Ripple’s motion regarding Programmatic Sales and Other Distributions was granted but denied concerning Institutional Sales. The aiding and abetting claims against Garlinghouse and Larsen were also denied.
The SEC contends that the court’s decision conflicts with established legal precedents set by the Supreme Court and contradicts fundamental securities law principles. Specifically, the SEC is challenging the classification of XRP sales on digital asset exchanges and other distributions that were not deemed securities transactions under the Howey Test .
The SEC’s spokesperson commented on the decision to appeal. They stated that the district court’s ruling contradicts long-standing precedents set by the Supreme Court, including established securities laws. They added that the SEC looks forward to presenting its case in the Second Circuit.
What the SEC is Appealing
The SEC is focusing its appeal on the portions of the ruling where the court denied its motions:
- Programmatic Sales: The sales of XRP tokens on digital asset exchanges, which the court ruled did not constitute investment contracts because buyers did not know the identity of the sellers.
- Other Distributions: This includes distributions of XRP as compensation for services or as part of other arrangements, which the court did not classify as securities transactions.
By appealing these points, the SEC aims to establish that all sales and distributions of XRP by Ripple should be considered securities transactions, regardless of the sale method or the buyers’ knowledge.
How the SEC Plans to Win the Appeal
The SEC’s strategy involves reinforcing the application of the Howey Test, a legal standard used to determine whether a transaction qualifies as an investment contract. The agency argues that the economic realities of the transactions satisfy the Howey criteria.
First is the investment of money, as investors use fiat or other cryptocurrencies to purchase XRP. Secondly, a common enterprise exists because the funds raised were pooled and used by Ripple to develop and support the XRP ecosystem.
Finally, the expectation of profits is evident, as investors purchased XRP anticipating profits derived from Ripple’s efforts. The SEC plans to present a comprehensive legal argument emphasizing that the method of sale or the anonymity of buyers and sellers should not exempt transactions from securities laws.
By doing so, the agency aims to close what it perceives as a loophole that could allow companies to bypass registration requirements and investor protections by using digital asset exchanges.
SEC Aims for Broader Crypto Control
A successful appeal could have far-reaching implications for the cryptocurrency industry. It would reinforce the SEC’s position that most digital tokens qualify as securities and are subject to federal securities laws. This could lead to increased regulatory oversight and require other crypto companies to reevaluate their token distribution methods.
The SEC’s decision to appeal underscores its commitment to enforcing securities laws within the rapidly evolving digital asset space. As the case moves to the Second Circuit Court of Appeals, all eyes will be on how the appellate court interprets the application of traditional securities law principles to modern cryptocurrency transactions.
On the Flipside
- The SEC’s appeal could prolong legal uncertainty for the crypto industry, affecting companies and investors awaiting clear regulations.
- The SEC’s insistence on applying the Howey Test to digital assets highlights potential gaps in current securities laws regarding cryptocurrencies.
Why This Matters
The SEC’s appeal against Ripple Labs could set a significant legal precedent. This may reshape the regulatory landscape for cryptocurrencies. If successful, it could classify more digital assets as securities, significantly impacting the entire crypto industry.
To learn more about Ripple’s new stablecoin, RUSD, and its impact on XRP, read here:
Ripple Hits 2M RLUSD Supply as XRP Open Interest Tops $1B
Curious about the implications of Bitwise’s XRP ETF filing? This article explores the potential impact and the SEC’s role in its approval process:
Bitwise Shoots for XRP ETF—Will It Survive the SEC’s Scrutiny?
