Last week, a US District Court in Manhattan granted summary judgment in Ripple Labs' (Ripple) long running battle with the US Securities and Exhange Commission (SEC) holding the XRP token ‘is not in and of itself’ a ‘contract, transaction[,] or scheme’ that meets the Howey requirements of an investment contract. It was thus held that the sale of XRP tokens by Ripple to institutional investors in blind auctions via cryptocurrency exchanges did not constitute an investment contract, due to the circumstances of the offering. Importantly, the decision illuminated the court’s approach in classifying digital asset tokens, with the court favouring the view that while tokens may be offered as a security (the equivalent of a financial product in the Australian context) depending on the circumstances, a token is not inherently a security or a financial product.
Following the Court's decision, Representative Ritchie Torres wrote a letter to the SEC Chair, Gary Genlser, commenting:
Regulating digital assets through enforcement only had a dreadful day in court last week…[the SEC] must reassess its continued assault on the crypto industry.
The letter emphasized the need for the SEC to transition away from regulation by enforcement that was ‘often politically timed’ and consider the Ripple judgment. The letter reinforced that the SEC must communicate and regulate by clear rule and guidance to redirect:
enforcement energies [to] where it belongs: on the bonafide bad actors who perpetrate serious transgressions like fraud, market manipulation, and the misappropriation of customer funds.
In an April hearing before the House Financial Services Committee, Committee members criticised Chair Gensler’s lack of a definitive answer to the question of whether ETH was a security or commodity. Gensler has on numerous occasions asserted that ‘most crypto tokens are securities’ and, therefore, most ‘crypto intermediaries’ rquire registration with the SEC. This issue was further addressed in Torres’ letter, where he stated that the SEC ‘indiscriminately declaring all crypto assets, except Bitcoin, to be securities’ lacks legal basis and is filled with contradiction:
When pressed about the status of ether as a security, Chair Gensler has been all over the place: yes, no, maybe so.
The latest developments follow Coinbase’s rulemaking petition in respect of crypto-asset securities filed with the SEC, in respect of which the SEC had been ordered to respond. The 2022 petition which was previously met with silence by the regulator sought clarity regarding the SEC’s approach to regulating crypto assets and interpretation of US securities laws. With increasing pressure on the SEC from market participants and members of Congress, the SEC's response is highly anticipated. Meanwhile, many in the industry continue to look to Congress to take action to establish a regulatory regime for crypto-assets that will comprehensively address the issues raised in the Ripple case.
Representatives Patrick McHenry and Glenn Thompson, two of the leading supporters of a new crypto bill circulating on Capital Hill, issued a joint statement following the decision promising to advance their bill out of committee to the full house this month. In respect of the Ripple decision, they lamented the Court's apparent failure to ensure protections for retail investors while noting that the Court's decision endorsed aspects of their proposed bill:
Outcomes like this are what happens when regulators force courts to make policy instead of Congress. Our comprehensive market structure legislation will give all investors, customers, and market participants the same longstanding protections found in traditional financial markets,
Read our full summary of the SEC v Ripple Labs, Inc. judgment here.