SECs Moves to Appeal Ripple's Victory on XRP Classification

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The U.S. Securities and Exchange Commission has made its move against the recent judgment favoring Ripple’s cryptocurrency, XRP. The SEC now contends that XRP should be viewed as a security.

This legal tussle traces back to a July 13 order when the court determined in partial favor of the defendants when Judge Analisa Torres regarded its sales of XRP tokens on exchanges and through algorithmic procedures not deemed as investment contracts.

The SEC, however, brings the Howey test into play when it released a statement one week later. Originating from the SEC v. W.J. Howey Co. in 1946, this test becomes the touchstone to categorize transactions as “investment contracts” or securities, a distinction that comes with significant regulatory implications:

“With respect to the Programmatic and other sales, the SEC respectfully avers that Ripple conflicts with and adds baseless requirements to Howey and its progeny. Respectfully, those portions of Ripple were wrongly decided, and this Court should not follow them.”

Interestingly, the court’s decision identified nuances in XRP sales. It highlighted that when acquired via digital exchanges, it wasn’t evident if XRP buyers expected profits based on Ripple’s actions or even if they knew their funds reached Ripple directly.

Drawing parallels, the SEC refers to a contrasting verdict from the SEC v. Terraform Labs case. Observers note that these inconsistent judgments from the same jurisdiction spotlight the potential “room for disagreement,” adding weight to the SEC’s appeal:

“As noted, one court in this District has expressly ‘reject[ed]’ the Order’s approach as to Programmatic Sales, reasoning that ‘Howey makes no such distinction between purchasers’ for purposes of determining whether investors had reasonable expectations of profits from the issuer’s efforts.”

Ripple’s On Demand Liquidity sales are also under scrutiny. While the court did find some of these sales in violation of Section 5, Ripple offered a counter-narrative, questioning whether all ODL sales can be said to have a “US nexus.” If Ripple turns to the Morrison v. Nat’l Australia Bank case as a defense, it could introduce another dimension to the dispute:

“Substantial discovery could be necessary to determine the validity of such claims. Ripple itself has accordingly proclaimed that the conclusion of the suit could ‘take years.’”

The appeal’s undercurrent suggests the SEC’s intent to bring more clarity to the cryptocurrency space under U.S. securities legislation. The outcome could set precedents for other digital assets, making this a landmark case in the digital currency ecosystem.

The stakes are high, as a concrete definition of a security in the crypto arena could redefine the industry, affecting a vast expanse of transactions and investments.

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