Does the SEC's appeal against Ripple have a chance of winning?
Date: 2023-07-25 Author: Karina Ziganova Categories: BLOCKCHAIN
The defeat of the US Securities and Exchange Commission (SEC) in the case against Ripple caused heated discussions. Now everyone is interested in the main question: does the SEC's appeal against the court's verdict on XRP have a real chance of success
In mid-July, U.S. District Judge Analysa Torres ruled in favor of Ripple Labs in a protracted case brought by the U.S. Securities and Exchange Commission (SEC) back in 2020. The court recognized that the sale of the native token of the XRP project is not an offer of investment contracts. This meant that XRP was not considered a security.
However, the verdict was not an unequivocal victory for Ripple. The judge also stated that XRP sales to institutional investors can still be classified as securities transactions. Former SEC employee John Reed Stark was quick to point out that the court verdict raises many questions and is likely to be appealed and overturned.
SEC is unhappy with the court's decision in the Ripple case
The Commission has already shown obvious dissatisfaction with Judge Torres' decision that a significant portion of XRP sales do not violate investor protection laws. The SEC called the verdict in favor of Ripple a "mistake" and intends to appeal it.
"Of course, many retail buyers purchased XRP with the expectation of making a profit, but they did not place these expectations directly on the efforts of Ripple. None of the retail buyers knew that they were buying XRP from Ripple," Torres said.
This decision excited the public. Other defendants, such as Do Kwon of Terraform Labs, are now trying to use this solution to counter the SEC's own allegations.
A key crush of the SEC's dissatisfaction relates to what the Commission called the "unreasonable criteria" applied by Judge Torres to the test to classify an asset as a security.
According to Torres, the sale of Ripple to institutional investors required oversight by the Securities and Exchange Commission. Meanwhile, the sale of Ripple to individual investors through crypto exchanges did not require such control.
The SEC believes that reconciling this reasoning with all the fundamental foundations of securities law is not an easy task.
"Contrary to [Terraform Labs'] claims, much of the ruling in the Ripple case supports the SEC's claims in this case and rejects the arguments, which [Terraform Labs] cited here. However, when it comes to selling to exchange users and other types of sales, the SEC respectfully argues that Ripple does not meet the Howey test and its predecessors and adds unreasonable criteria to them. With all due respect, these aspects of Ripple were resolved incorrectly, and this court should not follow them," the SEC said.
It will take years for the SEC to succeed
John Deaton, founder of Crypto Law and attorney for Ripple, cautions against perceiving the SEC's appeal as an obstacle to Ripple's recent triumph in court. In his opinion, even after the appeal is filed, the case will still drag on. He estimates it will be another two years after the appeal is filed before the 2nd Circuit makes a decision. Until then, Torres' decision will prevail in at least the 2nd District.
"In addition, even if the 2nd Circuit acknowledges that Torres made a mistake in applying the 3rd factor of the Howey test, this does not mean that the SEC will win with respect to sales to retail customers. All that's going to happen is that Torres will then apply the other two factors and likely make the SAME decision," Deaton said.
Deaton also notes that Torres' decision focused on the intricacies of the Howey test, which is a benchmark for determining the existence of an investment contract when selling an asset. It ruled that many XRP buyers may have expected to make a profit, but Ripple's actions did not shape these expectations.
Challenging the court's application of the Howey test would require the Securities and Exchange Commission to step into murkier waters and focus on aspects such as "investing money" and the existence of a "joint venture."
Ripple has yet to respond to other accusations
In his tweet, Deaton urged not to underestimate the importance of Ripple's victory. Indeed, this case is of particular significance because it is the first precedent in which a US judge gave preference to a cryptocurrency company, removing part of XRP sales from US securities laws.
However, the company is still breaking the law by directly selling XRP to institutional investors. As such, the judicial saga is far from over, and Ripple may still face legal challenges in the future.
Ripple CEO Brad Garlinghouse said it could take "years" for the SEC to appeal the court's decision. He has repeatedly spoken out to the SEC about abuse of power. In his opinion, the agency is unlawful declared itself a cryptocurrency regulatory authority.
Accordingly, the results of the SEC's appeal can largely set the future course of the cryptocurrency industry both in the United States and around the world.
