A well-known cryptocurrency company named Ripple recently won part of its legal fight with the U.S. Securities and Exchange Commission (SEC), perhaps creating a precedent for other crypto businesses involved in legal disputes with the regulatory body. The effect of the decision on the larger crypto business, experts warn, is still unpredictable and subject to possible appeals.
With claims that they run unregistered trading platforms and list unregistered assets, including cryptocurrencies like Cardano (ADA), Solana (SOL), Polygon (MATIC), and Filecoin (FIL), the SEC has been focusing on key exchange platforms like Coinbase, Binance, and Bittrex this year. The SEC’s allegations were recently rejected by the U.S. District Court for the Southern District of New York, which found that certain XRP token sales and payouts did not meet the criteria for being classified as investment contracts.
Legal experts’ perspectives on the relevance of this decision have varied. While some see it as a game-changer for the SEC’s enforcement operations, others think its application may be rather restricted. Former SEC lawyer Teresa Goody Guillén, now a partner at the law firm BakerHostetler, believes that the decision may be considered as a useful precedent for businesses like Coinbase and Binance in fighting claims that they operate as unregistered securities exchanges.
The SEC will probably concentrate on the portions of the court ruling that support its views on the statutory status of coins and tokens as securities, according to Joe Castelluccio, a leader in the fintech and digital assets divisions at law firm Mayer Brown. Castelluccio issues a warning, pointing out that the positive features of the judgement for Ripple are fact-specific, making it difficult for other participants in the market to depend on those parts unless their circumstances exactly match.
Contrary to what the SEC claimed in its civil complaint filed in 2020, the U.S. Southern District Court of New York recently determined in summary judgment that certain XRP token sales and distributions did not violate securities laws. The industry reacted favorably to this decision, which makes it clear that bitcoin tokens are not securities in and of themselves. Brad Garlinghouse, the CEO of Ripple, expressed confidence in the business’ adherence to the law and place in history. The announcement caused the price of XRP to increase by up to 96%.
Legal professionals point out that the SEC’s argument that secondary sales of digital assets on exchanges like Coinbase represent the sale of unregistered securities is contested by the court’s ruling. If affirmed on appeal, this decision may severely curtail the SEC’s authority over the cryptocurrency industry. The judgment’s effects, meanwhile, could only be felt in situations that predominantly involve secondary market activity. The decision, which agrees with SEC Chair Gary Gensler’s view that the majority of initial coin offerings (ICOs) are securities, was notable for classifying institutional sales of XRP as investment contracts.
In order to avoid being labeled as investment contracts, as was the case in this instance, the sector may now look at other distribution strategies for digital assets. However, if the SEC decides to appeal, some legal experts, like Preston Byrne from the law firm Brown Rudnick, contend that the ruling’s inconsistent handling of institutional sales and other distributions may be erroneous.
The SEC’s motions, including the institutional sales of XRP, will go to trial even if Thursday’s decision prevented the case from going to trial in its entirety. The long-term effects of this decision for the cryptocurrency business and its relationship with the SEC, however, remain to be seen.
