Ripple has obtained a victory in the momentous lawsuit that it has against the SEC. And the consequences not only affect the cryptocurrency itself, but all future cases that the crypto sector may have with the United States regulatory bodies. At stake is determining to what extent cryptocurrencies are a ‘security’ or security. A fundamental question to see to what extent they can be required as other financial instruments.
For the first time, a judge determines that XRP is not a ‘security’. Judge Analista Torres, of the Southern District of New York, has left in writing for the first time his conclusion on this question that divides the sector so much.
“XRP, as a digital token, is not itself a ‘contract, transaction or scheme’ that incorporates Howey’s requirements of an investment contract,” Torres says. In other words, XRP, Ripple’s token, is not a security or ‘security’ that can generate profit through a third party, as stocks can for example.
A bit of context. Since 2020, the Ripple cryptocurrency has been facing a lawsuit from the United States Securities and Exchange Commission (SEC). The regulator defends that the token itself was used to generate profits, of up to 1.3 billion dollars since 2013. By understanding XRP as a ‘security’, Ripple would have been illegally trading unregistered securities.
The case of Ripple and its XRP token is the one that has climbed the highest at the judicial level, but it would be perfectly applicable to other cases such as Solana, MATIC, Binance USD or Cardano. For this reason, this ruling favorable to Ripple, although not final, is seen by the crypto industry as a general victory.
When and when not. If it were so easy to say that XRP is or is not a financial asset, there would not be such a long and complex trial. The judge explains that XRP was a security when Ripple first sold it to institutional investors who had expectations of profit, but that the token was no longer a security when it was sold between anonymous buyers and sellers on secondary markets. That is, through exchanges.
Here the position of the sentence is that the fact of categorizing tokens as a financial asset or not depends on the information and knowledge of the people who are accessing them; not just the properties of the token itself.
‘Securities’ vs. ‘Commodities’. For these investors, XRP was a financial product that they could use to generate profit through various avenues, in coordination with others. Instead, for buyers through exchanges it was simply a virtual currency.
Following this idea, Bitcoin is not at any time a security. Not even the SEC questions it. It is a ‘commodity’ and this is so because due to its composition it is structured so that there are not a few investors who can modify the value at will, for example by burning tokens or making changes among a few.
A win for exchanges, like Coinbase. According to this way of the judge to understand the legal debate, the exchanges will be able to sleep more peacefully. It’s a setback for the SEC, which has sued exchanges like Coinbase for illegally offering these securities.
According to Justin SlaughterLegal Director of Paradigm: “Proving that secondary token sales are securities will be very difficult under this logic. The SEC can appeal, but most likely, even if they win at the appeal level, they will lose in the Supreme Court.”
What is the Howey test. If we look at the judge’s argument, reference is made to Howey’s requirements. It is a test that refers to the 1946 SEC v. WJ Howey Co Supreme Court casewhere it is described if something is a financial value if it meets a series of requirements:
- an investment of money
- in common company
- With the expectation of making a profit
- Derived from the efforts of others
Let’s see what happens with Ripple and XRP. The judge explains that no one doubts that there is a payment of money. Something that can be applied even in the cases of exchanges. But the rest of the requirements would only be met by specialized investors.
The existence of a “common company” occurs in these cases because “the fortunes of the institutional buyers were linked to the success of the company, as well as to the rest of the other buyers.”
That “reasonable expectation of gains derived from others” is also met, as those initial XRP investors knew what they were getting into.
From the SEC they point out that this way of interpreting the law is unfair. John Reed Stark, a former SEC official, Explain that the court decision “is problematic on multiple fronts.” His main argument is that the people who should be more protected, anonymous investors through exchanges, are the ones who in this case receive less support.
“In other words, the rich get support and recourse, while the poor don’t. This seems unfair and contradicts the very foundation of US Securities laws,” Stark explains. Mainly due to the fact that considering XRP as a security implies more demands.
The debate will continue until the Supreme Court (or Congress) decides. Ripple’s lawsuit against the SEC is not over. It’s just a small victory. Right now is the first time that Justice has ruled clearly on whether XRP is a ‘security’. Between allegations and qualifications, the case will end up being decided in the Supreme Court. His position will ultimately determine when cryptocurrencies are considered financial assets like stocks or just basic currencies like the dollar.
Another option is for Congress to decide to change the law to settle the debate. Various congressmen they have opened this way after hearing Judge Torres’ decision. However, although that would be the best option for the SEC, it is far from happening due to the lack of consensus.
In Europe, a third way has been chosen: creating specific legislation for cryptocurrencies, where they are treated neither as ‘securities’ nor as ‘commodities’, but with their own characteristics and obligations. A regulatory strategy far removed from the American philosophy to address these issues.
Image | wit olszewski
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