{"id":36270,"date":"2023-07-16T02:12:42","date_gmt":"2023-07-16T06:12:42","guid":{"rendered":"https:\/\/ifintechworld.com\/investing\/a-wild-outcome-how-the-ripple-decision-scrambles-the-battle-between-sec-and-crypto-industry\/"},"modified":"2023-07-16T02:12:44","modified_gmt":"2023-07-16T06:12:44","slug":"a-wild-outcome-how-the-ripple-decision-scrambles-the-battle-between-sec-and-crypto-industry","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=36270","title":{"rendered":"A \u2018wild outcome\u2019: How the Ripple decision scrambles the battle between SEC and crypto industry"},"content":{"rendered":"
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A federal judge dealt a significant blow Thursday to Security and Exchange Commission Chair Gary Gensler\u2019s quest to bring the crypto industry to heel, but securities-law experts warn that the legal and political implications of the decision are difficult to predict and may not prove to be a lasting victory for investors in digital assets. <\/p>\n

U.S. District Judge Analisa Torres\u00a0ruled that Ripple Labs\u2019 crypto token, XRP, is not a security when sold on digital-asset exchanges to the general public, but that Ripple\u2019s sales to sophisticated institutional investors did qualify as an unregistered sale of investment contracts, in violation of federal law.<\/p>\n

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The decision rested on XRP\u2019s
\n XRPUSD,
\n -0.53%<\/bg-quote>
\n status as an investment contract, which are regulated as securities by the SEC. Torres said that XRP only qualified as an investment contract when Ripple Labs sold them directly to institutional investors, but did not qualify as such when those tokens were resold on third-party platforms. <\/p>\n

Read more<\/strong>: Ripple token not a security in retail sales, judge rules in partial win for crypto<\/p>\n

Arthur Gabinet, a former SEC lawyer and a lecturer at Brown University, told MarketWatch that the ruling would prove to be controversial because it is uncommon for an asset to be considered a security in one context but then to lose that designation when resold in another context. <\/p>\n

\u201cIf you\u2019re distributing a token that\u2019s a security because it\u2019s an investment contract, it doesn\u2019t matter if it\u2019s a secondary-market transaction,\u201d he said. \u201cIt seems to me that it\u2019s still a security. I think the decision may be incorrect as matter of law.\u201d He predicted that the SEC will ultimately appeal the decision. <\/p>\n

Other experts, however, agreed with the reasoning that an asset could qualify as an investment contract in one context but not in another. <\/p>\n

Federal courts follow the so-called Howey test to determine whether a transaction is an investment contract and therefore a security subject to SEC oversight. Under this test, an investment contract is a transaction whereby a person invests money in a common enterprise and is led to expect profits through the efforts of others.<\/p>\n

Michael Selig, a lawyer at Willkie Farr & Gallagher who specializes in digital-asset regulation, said that the court \u201cvery reasonably took the view that the investment contract and the subject of the contract are separate things\u201d and that just because XRP was distributed to institutional investors as part of an implied contract between them and Ripple, it doesn\u2019t mean that every subsequent sale of XRP also constitutes an investment contract. <\/p>\n

See also<\/strong>: Crypto bulls are thrilled by court ruling that XRP isn\u2019t always a security<\/p>\n

The decision, Selig argued, is most clearly a victory for digital-asset exchange Coinbase Global Inc.
\n COIN,
\n -1.58%<\/bg-quote>,<\/span>
\n which the SEC sued last month for operating an unregistered security exchange. Following the logic of the Ripple decision, tokens offered on Coinbase are likely not securities in that context, even if they were security sales in other contexts. <\/p>\n

Nevertheless, it is not a vindication of Ripple\u2019s argument, also promoted by many other digital-asset issuers, that a token can only be a security if it confers rights on the holder of that security, in the way that a stock in a public company confers voting and ownership rights to shareholders.<\/p>\n

Justin Slaughter, policy director at the crypto-investment firm Paradigm, wrote on Twitter<\/a> that the decision leads to an ironic outcome \u2014 that sophisticated institutional investors are deriving more protection from securities laws than unsophisticated retail investors. <\/p>\n

\u201cThat\u2019s what happens when courts decide policy \u2014 wild outcomes,\u201d Slaughter said, contrasting court-made policy with Congress\u2019s ability to more thoughtfully craft new laws. <\/p>\n

But this decision, even if it holds up on appeal, still leaves the SEC with the power to contest digital-asset sales on a case-by-case basis and does not give the industry the regulatory clarity it has long sought. <\/p>\n

Slaughter argued the decision therefore makes it much more likely that there will be a legislative compromise on a new crypto regulatory framework, because Democrats will see that the status quo provides less protection for ordinary investors than they thought just 24 hours ago. <\/p>\n

The timing of the decision is particularly interesting given that the House Financial Services Committee had been planning to consider a new bill to regulate crypto-market structure next Wednesday, just a few days following the reintroduction of a bipartisan, comprehensive crypto regulatory bill in the Senate this week.<\/p>\n

\u201cIt\u2019s about to be a very intense and exciting 96 hours in Washington, maybe the most consequential few days in crypto policy history,\u201d he wrote. \u201cBuckle up.\u201d <\/p>\n<\/p><\/div>\n<\/div>\n