The future of U.S. crypto regulation could hinge on a long-awaited decision by Wall Street’s top cop on whether to appeal a ruling from its high-profile legal battle with blockchain payments company Ripple.
The Securities and Exchange Commission has until Oct. 7 to decide if it will challenge the July 2023 ruling by U.S. District Judge Analisa Torres that deemed only some of Ripple's sales of the XRP crypto token violated securities laws, a decision that has garnered criticism from securities lawyers and other federal judges.
That said, the ruling is considered a major legal victory for the still-nascent crypto industry as it attempts to prove that the emerging asset class is not in violation of U.S. securities laws, as the SEC believes. It has also become a cornerstone in the legal strategies of other crypto entities like exchanges Coinbase, Binance and Kraken, which are currently being sued by the commission for allegedly selling unregistered securities.
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That’s why former SEC lawyers who spoke with FOX Business say an appeal is likely as the agency, and its crypto-skeptic chairman, Gary Gensler, are determined to assert jurisdiction over the $2 trillion industry and don't want to endorse a dual system of disclosure that the Torres opinion could create in the securities markets.
"I believe the SEC will appeal. I would think it would not want to have the programmatic trading analysis stand," said Marc Powers, a blockchain professor at the Florida International University College of Law and former SEC enforcement attorney. "It creates inconsistency in rulings by district court judges and in the Second Circuit."
Press representatives for the SEC and Ripple declined to comment for this story.
The SEC already signaled its intent last year when it filed a so-called interlocutory appeal (an emergency appeal that’s filed before summary judgment) to challenge Torres' decision. Torres denied the request but said the SEC could try again after summary judgment.
Disclosure is the bedrock of the nation’s securities laws. When a company sells stock to raise capital and expand operations, it’s required to make voluminous filings that provide investors with the information they need to gauge whether to buy shares. Some legal experts say Torres’ ruling upended this disclosure mandate.
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Her decision stated that Ripple's $728 million in sales of XRP to institutions were securities transactions because the institutions bought the tokens directly from Ripple, thus entering into an investment contract, a key condition of the Howey test which is used to determine whether an asset is a security. However, sales to retail investors – because they were purchased via exchanges and not through Ripple directly - did not satisfy the investment contract condition of Howey, thus disqualifying them as securities.
The logic is controversial because, according to some securities lawyers, it leaves the door open for retail investors to not receive the same oversight that institutional investors receive. Retail investors, for example, buy stock in the secondary market and use public disclosures in making market bets.
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Torres’ summary judgment ruling came down in August and resulted in Ripple having to pay a $125 million fine for selling XRP to institutional investors. Earlier this month, Ripple requested a stay on the penalty payment to the SEC, leading some crypto watchers to believe this could be a signal Ripple is bracing for the SEC to appeal.
"Where we disagree with Judge Torres is that there’s no need to create two categories of people because whether you’re sophisticated or not, at the end of the day, you’re still buying the same token," SEC trial attorneys noted during January oral arguments for its lawsuit against Coinbase.
Another SEC enforcement attorney who left the agency to join private practice earlier this year believes the widespread opposition to the ruling inside the SEC will be a driving factor behind a potential appeal.
"Everyone over there truly believes that the decision is wrong, that it’s not good law, and should be appealed," the lawyer, who spoke on the condition of anonymity, said. "I think most securities lawyers, regardless of how they feel about crypto, would agree it wasn’t a very well-regarded ruling."
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But legal minds representing the crypto industry disagree. They say it would be a waste of the agency’s already limited resources to appeal a single issue in such a broad case that it has a reasonable possibility of losing.
"Of course the SEC thinks the opinion is wrong – they were on the losing side," said Jeremy Hogan, a partner at the law firm Hogan & Hogan and a frequent commentator on the Ripple case. "What the SEC should be thinking of right now is whether an appeal furthers its mandate of investor protection and capital formation."
The agency has faced criticism from lawmakers, and even from some of its own staff, that it’s wasting resources on aggressive crypto enforcement against good actors when it could be helping investors in other areas.
Hogan explains that because the Ripple case involves a fixed set of facts and circumstances that deal with more than just programmatic sales of XRP, it may not be the smartest case for the SEC to appeal if it’s looking to directly address those sales.
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"The Coinbase and Binance cases seem more relevant to the current enforcement priorities and will address secondary sales in a more direct way," said Marc Fagel, a former SEC attorney and crypto critic. "Ripple is just a single issuer, while exchanges present a much broader systemic risk to investors, and the legal landscape is much more up in the air."
"Still, the Ripple ruling on programmatic sales is problematic for the SEC even outside the exchange context," he added.
The former SEC lawyer who wished to remain anonymous echoed Fagel’s sentiments.
"The agency needs to decide what is the best case to go in front of the Second Circuit – is it the Ripple case, or should the SEC hold off for now and wait for an exchange case like Coinbase to appeal, which would have a better chance at putting the secondary sales issue squarely before the court?"
Coinbase is still in the discovery phase of litigation with the SEC after the agency sued the U.S.'s largest crypto exchange last year. An appeal there, according to legal types, could take years.
