What Could Happen If the SEC Appeals in the Ripple Case?-banner-imageResearch

What Could Happen If the SEC Appeals in the Ripple Case?

On July 13, 2023, Thursday, Judge Analisa Torres of the Southern District of New York reached a significant stage in the long-standing Ripple case involving the U.S. Securities and Exchange Commission (SEC). The ruling in the Ripple case concluded that Ripple's XRP token sales to institutional investors directly violated SEC rules, while the offers made to retail investors on exchanges did not. This decision was seen as a victory for the crypto ecosystem.

However, days after Ripple's partial legal victory, the SEC signaled its intention to appeal. The SEC requested a federal judge to overlook certain aspects of the recent decision in its case against Ripple Labs, claiming that the decision was not in line with the existing securities laws and indicated the possibility of an appeal.

According to John Deaton, the founder of Crypto Law, the SEC's decision to appeal in the case against Ripple Labs does not significantly harm Ripple's recent court victory. Deaton countered claims on Twitter, stating, "The appeal is not even close to a setback. No one should underestimate how important this win is." He also emphasized that the appeal process within the court system would take a considerable amount of time, stating, "It will take two years for a decision to be made by the 2nd Circuit. Judge Torres' decision stands until then."

Judge Torres had previously ruled that the Howey Test, a methodology used to determine whether an asset sale involves an investment contract, was insufficient to establish XRP's sales to the public as securities, as there was no "reasonable expectation of profits derived from the entrepreneurial or managerial efforts of others." She stated, "Many programmatic buyers may have purchased XRP with the expectation of profit, but such expectations were not derived from the efforts of Ripple." Deaton mentioned that even if the SEC successfully challenged Torres' application of the Howey Test in this aspect, Torres might still reach the same conclusion when considering other factors, such as the presence of an investment of money and a common enterprise.

As the appeal process for the Ripple case unfolds, considering its potential to shape future crypto regulations and provide more clarity for industry participants, the entire crypto ecosystem is expected to closely follow the outcome of this case.

What is the Howey Test?

The Howey Test is used to determine whether an asset qualifies as a security, and it examines the following characteristics:

• Can it be acquired through an investment of money?

• Is there an expectation of profits from the investment?

• Is the investment made in a common enterprise or with a company?

• Are the profits derived from the efforts of a third party or entrepreneur?

Ripple's Chief Legal Officer, Stuart Alderoty, commented on the matter in his recent statement, saying, "A securities regulator only has jurisdiction over securities. Pretending otherwise is merely a political power play. It benefits no one and harms everyone.

What does SEC Chairman Gensler think about Ripple's legal victory?

In his initial statement regarding Judge Torres' ruling in the Ripple case, SEC Chairman Gary Gensler expressed "disappointment" over the partial loss in the case as the regulatory body attempts to regulate the crypto 'Wild West.' He mentioned that the SEC is still evaluating the decision made by Judge Analisa Torres of the Southern District of New York. However, Gensler noted that he is satisfied with the part of the ruling that found Ripple's XRP token sales of approximately $728.9 million to institutional investors to be in violation of securities laws.

Gensler's Views on Ethereum (ETH)

In April, while speaking before the House of Representatives, Gensler emphasized that most cryptocurrencies are considered securities. He highlighted the importance of compliance with securities laws, stating that it is not a matter of choice but a legal requirement. Gensler pointed out that crypto intermediaries often combine various functions such as exchange, brokerage, custody, settlement, and lending, leading to potential conflicts of interest and risks for investors. He argued that crypto investors should enjoy the same protections as other investors and that labeling oneself as a DeFi platform does not exempt one from securities laws.

When questioned by Representative Patrick McHenry about whether Ethereum (ETH) is a commodity or a security, Gensler refused to give a direct answer and instead referred to the Howey Test. McHenry posed the same question again, but Gensler still did not provide a clear response. McHenry commented on the lack of clarity in the market due to the regulatory actions of the SEC and the CFTC, stating, "Your regulatory actions and those of the CFTC show a significant lack of clarity.