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Crypto Securities Contention: SEC's Call for Reassessment

Martin Walker
Aug 19, 2023 at 04:58 pm

The SEC contends that a plea for reconsideration is warranted due to the divergent viewpoints surrounding the correlation between cryptocurrency and securities law among distinct judiciaries.

In an effort to recalibrate the discourse, the U.S. Securities and Exchange Commission (SEC) has formally lodged a request to obtain consent for a revisitation of a recent federal court verdict. This verdict posited that the secondary trade of Ripple's XRP token does not fall under the purview of securities.

The regulatory body maintained that there remain "significant grounds for disparity of opinion" regarding the application of securities regulations to the realm of cryptocurrency. The agency recurrently alluded to a parallel legal case involving Terraform Labs, wherein the presiding magistrate handed down a divergent decision.

Continuation of the Ripple Matter?

This legal maneuver, which was submitted on the last day of the working week, contested two determinations rendered by Judge Analisa Torres in the preceding month. The first rejected the classification of "Programmatic Sales" of XRP (e.g., secondary market transactions) as satisfying the Howey Test, while the second similarly dismissed "Other Distributions" (e.g., compensation for services) as insufficient.

The agency elaborated, stating, "Substantial differences of opinion persist concerning the accuracy of both rulings." Moreover, the SEC emphasized that "subsequent to the ruling by this Court, another tribunal within this jurisdiction openly contradicted the Order's verdict regarding the Programmatic Sales."

Soon after the adjudication concerning Ripple, Terraform Labs endeavored to exploit the situation by seeking the dismissal of a parallel SEC lawsuit against their enterprise. The motion contended that the agency's allegations of securities fraud in relation to the unregistered TerraUSD (UST) stablecoin lacked merit due to its collapsed status.

However, District Judge Jed Rakoff dismissed the argument, refusing to delineate between "institutional" and "secondary" market transactions in terms of their classification as securities. At that juncture, he underlined, "Such differentiation is not endorsed by Howey." 

The regulatory body drew upon numerous previous legal precedents, including its litigations against Telegram and LBRY, as evidence that instances of violations of securities legislation had been established in cases where transactions were brokered through intermediaries, including exchanges.

"The Terraform court's perspective, for instance, hinges on the issuer's ability to provide investors with a lucid understanding of the matter and is not contingent upon the procedural execution of the transaction," the SEC posited.

Additionally, the regulatory agency opined that the origin of XRP acquisition should not impact the determination of whether Ripple had established a reasonable anticipation of profit for investors - a fundamental tenet that defines an investment contract.

Lawyers Lend Their Insights

Legal practitioner Joe Carlesare, an advocate of Bitcoin, lent his endorsement to the SEC's request for reconsideration. He concurred that the promotional endeavors of cryptocurrency issuers equally influence both primary purchasers and those involved in secondary market dealings.

"This mirrors the economic realism of the cryptocurrency sphere, where a substantial majority of participants are reliant on the development and promotion efforts of the project team," he asserted.

Conversely, Sandy Seth, a legal representative aligned with XRP, dismissed the SEC's stance as "exceedingly absurd." This is primarily due to the fact that the agency refrained from appealing Judge Torres's determination that XRP itself is not a security.

"If XRP is explicitly not categorized as a security, then how can the sale of XRP be deemed the sale of a security?" he inquired.

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