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Cryptogambling / SEC plans to appeal Ripple’s ruling amid crypto legal battle

SEC plans to appeal Ripple’s ruling amid crypto legal battle

Publish Date: 24/07/2023
Video: Ripple wins: Crypto expert says SEC lost its biggest case ever

Ripple wins: Crypto expert says SEC lost its biggest case ever

The U.S. Securities and Exchange Commission (SEC) has shown intention to appeal the recent rulings in the Ripple lawsuit.

In the ongoing legal battle against Terraform Labs and its CEO Do Kwon, the SEC filed new documents last Friday, claiming that the judge’s rulings in the Ripple case were “wrongly decided” and may be subject to appeal.

“Contrary to Ripple’s assertions, much of the ruling supports the SEC’s claims in this case,” the documents said. “Those portions of Ripple were wrongly decided, and this court should not follow them.”

The federal judge ruled in favor of Ripple, saying the company did not violate any securities laws when offering its native token XRP to retail investors. However, it breached the law concerning institutional investors.

The controversy lies in the application of the Howey test, a legal assessment used to determine if a financial instrument qualifies as an investment contract under SEC regulations.

Terraform’s lawyers cited the Ripple ruling as their defense and requested the dismissal of the lawsuit against them. The SEC argues that the judge should dismiss the Ripple case’s recent rulings on XRP’s retail sales. The ruling is said to create an artificial distinction between the expectations of retail and institutional investors.

“The court must draw reasonable inferences in the SEC’s favor, including that the institutional buyers in this case — such as trading firms that purchased [Ripple’s] crypto assets with no restrictions on resale—purchased because they viewed the assets as an investment opportunity into Terraform’s efforts,” said the SEC.

SEC’s appeal ‘not a setback’

CryptoLaw founder John Deaton dismisses the notion that the SEC’s potential appeal would be a significant setback for Ripple.

“An appeal is not even close to a setback,” the crypto lawyer said via Twitter. “Don’t let anyone underestimate how significant this win is.”

Deaton said an appeal would take considerable time, suggesting it would be at least two years before the Second Circuit’s decision. Until then, the recent ruling in favor of Ripple remains the law.

SEC Chair Gary Gensler has said he is “disappointed” with some aspects of the decision, which could have far-reaching implications for other tokens facing regulatory heat.

In the Ripple case, Judge Analisa Torres ruled that XRP is not necessarily a security except when sold to institutions to raise funds. The judge determined that public buyers of XRP did not have a reasonable expectation of profits derived from Ripple’s efforts, a critical factor in the Howey test’s application.

Deaton further explained that even if the SEC successfully challenged Torres’ application of the Howey test on one front, she could still rule similarly when considering other aspects of the test, such as a “common enterprise” and the “investment of money.” It presents a significant challenge for the SEC, as proving a common enterprise is far more difficult than demonstrating an expectation of profit derived from others’ efforts.

Ripple CEO Brad Garlinghouse described the ruling as an “unequivocal win for Ripple and for crypto in the U.S.” He highlighted the need for clear legislation rather than regulation by enforcement. Garlinghouse criticizes the SEC for overstepping its jurisdiction and claims the agency created confusion in the crypto space.

Ripple chief legal officer Stuart Alderoty also said the SEC is pretending to have jurisdiction where there is none, calling it a political power play that ultimately harms everyone involved.

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