"partial" win!? It's hard to see what would be a "win" otherwise... It's going to have also larger implications - the SEC somehow manages to lose that one, it was hard to imagine or predict. If not even XRP is a security, there is truly no other coins which could be a security. Hate it or love it, but the SEC is simply going to lose all their other lawsuits
EDIT: oh funny ... Reuters edited their title and removed "partial" :-)
> "partial" win!? It's hard to see what would be a "win" otherwise... It's going to have also larger implications - the SEC somehow manages to lose that one, it was hard to imagine or predict. If not even XRP is a security, there is truly no other coins which could be a security.
This is explained in the article. It was good day for this crypto scam, but it wasn't all good news for them:
> The ruling was also a partial victory for the SEC. The judge held that Ripple violated federal securities law by selling XRP directly to sophisticated investors, and that a trial should be held over its executives' role in those sales.
Also:
> Hate it or love it, but the SEC is simply going to lose all their other lawsuits
Quite a bold statement there, based on a single ruling...
> Quite a bold statement there, based on a single ruling...
And a ruling on ripple, which from architectural standpoint is rather stretching the bounds of what is typically thought of as a cryptocurrency -it isnt mined or staked and the blockchain is even more of a pretend decentralization gimmick than the rest of the tokens out there. it's much more like corporate scrip controlled by a handful of bank-owned validator supernodes. In terms of ownership structure it's what Bitcoin would drift into over time if the lightning network actually becomes the predominant means of interacting with it.
Should be noted this decision came from an Obama appointee judge in a fairly liberal district (SDNY). The Second Circuit is half Federalist Society judges, and six out of the nine SCOTUS justices have been on a consistent battle to roll back the power of the regulatory agencies. Pretty hard to see how the case becomes more favorable for the SEC on appeal.
Appellate courts set binding precedent, but district courts routinely look to eachother for guidance on how to rule on questions where there is no circuit/SCOTUS ruling.
Similarly, a judge in one circuit may look to the decision of a different circuit court when their own circuit has yet to rule on an issue.
The SEC would be dumb as hell to appeal this ruling, 2nd circuit could rule in the SEC’s favor but this Supreme Court?
I double dare the SEC to appeal
The commission might not exist the very next day and that would be hilarious, they’ll take it back to the New Deal itself and wonder why the SEC survived when so many other New Deal programs got overturned
unregistered sales of securities aren’t violations of the securities act when relying on an exemption from registration, to accredited and qualified investors…
just because they might not have filed a Reg D notice for their SAFE doesnt mean the whole transaction is invalid
But the key is the trial goes on and if not this court then some other will get to see that the buyers of XRP are buying shares of Ripple i.e. securities.
If this stands it clears Ripple, but not necessarily the exchanges (footnote 16 in page 23). If SEC gets that one, that would be enough of a win for them - without the offramps, these coins wouldn't survive.
Forgive me, I know little about crypto, and am bearish on it, but:
My understanding is that Ripple was very much meant to be a currency/commodity, unambiguously, where most other crypto backed by whitepapers were meant to be securities on the basis that they were meant to back some hare-brained scheme or have some utility beyond simply being a means of transfer. If I'm right about that, then surely Ripple has one of the strongest arguments for not being a security?
Bitcoin IS money. Record high numbers of people are onboarding to bitcoin and not coming back to fiat. It’s just as much an “investment” as the US dollar is.
Right, 500 of the largest public companies in the largest economy, is equivalent to a magic money box. It's not like they collectively have hundreds of billions in revenue or anything.
- Ripple's sales of XRP to institutional buyers were investment contracts, but
- programmatic sales via an anonymous exchange were not.
The ruling emphasises the distinction between an asset and an investment contract. An orange grove isn't an investment contract. The sale of an orange grove may or may not be an investment contract. Determining whether or not is governed by the Howie test.
> The sale of an orange grove may or may not be an investment contract. Determining whether or not is governed by the Howie test.
I liked the era when people vaguely claimed that their coins weren’t a security because securities need to be registered. It had an “I’m not an alcoholic, alcoholics go to meetings” flare to it. I tried to get in on the fun with a vaporware cryptocurrency, OrangeGroveCoin. It got a disturbing amount of investment interest.
The SEC should've left crypto alone. Instead of crypto getting destroyed by the SEC, now it looks like the SEC might get destroyed by the judicial branch if they choose to go up the chain with this case. This SCOTUS is massively unfavorable toward the executive making up rules to enforce, or taking liberties with interpreting standing law. If it gets there I imagine a 6-3 Alito opinion gutting the SEC's wiggle room in defining a 'security' and enforcement reach.
And with the deep pockets of the crypto puppet masters and all the evidence coming out about the Justice’s susceptibility to taking as many “gifts” as they can get their hands on, that just further solidifies the pre-determined outcome.
The US has a standing doctrine called 'delegation', where the executive is allowed to make up rules and enforce them. The Federalist Society finds that doctrine to be unconstitutional and wants to chip away at it. All 6 conservative justices have ties to the Federalist Society, so it really doesn't require any lavish gifts in this case.
Even the doctrine of delegation has limits, and most of the executive branch isn't elected, so the only real check on their power is the judiciary.
Congress (whichever half shares the party with the presidency) loves delegation, because it means they aren't to blame when people don't like the results- they don't even have to take a position by voting!
Great day for crypto and for financial freedom in general. Great to see the justice system finally rebuking these unelected bureaucrats and placing some limits on the power they claim to have.
The unelected bureaucrats are authorized by duly elected politicians. They do not coalesce in office from the ether, they're put there by elected officials. It's not like there's no oversight.
They are not authorized to regulate which isn't their authority, they were breaking the law. I don't even like Ripple, I think it's a scam. But if the SEC can't even win on this one, which they clearly picked first because it would have been the easiest given it's extremely centralized nature, Gensler's game is over.
I wasn't responding to this specific case, I was talking about the common "unelected bureaucrat" trope that falsely represents that gov't agencies are somehow "bad" because they're not directly run by politicians.
The liability to “sophisticated investors” prevents immediate dismissal. Now the court gets to see that complicated institutionals were speculating on XRP, and that means the Court will get to consider how easy it was to speculate or “invest.” XRP requires no mining, it’s a share offering no different than any security sale.
Looks like the crypto critics are now confused and have gone silent again after the Bitcoin leveraged ETFs getting approved and now they got this one wrong again. Just for the ones at the back, it is absolutely NOT the SEC that determines what is and what isn't a security and the SEC does NOT get the final say, which this summary judgement has already shown.
But of course complain all you want, but there was a reason why the SEC did not want the Hinman documents unsealed (whilst everyone else was screaming at another hysteria around Coinbase in [0]) and the SEC attempted to request those documents to be sealed and that was denied as well. [1]
> But Torres ruled Ripple's XRP sales on public cryptocurrency exchanges were not offers of securities under the law, because purchasers did not have a reasonable expectation of profit tied to Ripple's efforts.
> Those sales were "blind bid/ask transactions," she said, where the buyers "could not have known if their payments of money went to Ripple, or any other seller of XRP."
I bet this gets overturned on appeal. It makes no sense to me. Seems like a huge loophole if it stands. Maybe it's explained better in the actual ruling, anyone have a link? Of course you can count on Reuters to never link to important information.
Not really, unless XRP is a share of a company (it's not) and promises dividends (it doesn't), there's no expectation of profit by purchasers of XRP.
Profits from speculation is not the same as profits from business activities. People purchase everything from bar codes (yes, 11 digit bar codes are a commodity with limited supply), to trailers, to collectible video games, to oil and minerals, precious metals, art, antiques, etc etc all on speculation that they'll be worth more in the future.
Any speculative profit you hope to make on XRP is entirely reliant on the business of Ripple. They control and run and improve and promote the network, and without those efforts XRP would not have any hope of increasing in value at all. It's plain as day that people purchasing XRP rely on the efforts of Ripple the company for their expectation of profit, regardless of who they purchase the XRP from.
Any speculative profit you hope to make on buying a limited edition Rolex is entirely reliant on the business of Rolex continuing to market the brand of Rolex.
But if you don't have a formal contractual relationship with Rolex SA, then it's quite simply not an investment contract.
> Any speculative profit you hope to make on buying a limited edition Rolex is entirely reliant on the business of Rolex continuing to market the brand of Rolex.
That is not at all true. Rolexes will continue to accrue value even (especially?) if the company goes out of business.
To the extent that the Rolex brand has a certain inertia that will propel it further even after the company ceases to exist, that inertia can be attributed to company's previous marketing efforts.
Indeed, the brand may retain value for some time even if the company goes out of business, perhaps even for a very long time. Nevertheless, that doesn't negate the fact that ongoing marketing efforts can amplify the brand's value and momentum, and the brand's inertia will be even stronger should the company cease to exist.
Another way to look at this is to put yourself in the shoes of a prospective buyer in 1923. Wouldn't you say in that situation you rely on the company's continuing marketing efforts to further the value of the brand? At what point in the last 100 years do you stop relying on the company's efforts?
Also, Rolex can easily destroy brand value with ill-considered promotional campaigns, so you rely on the company to not mess it up.
I think if you have to go a full hundred years in the past to make this point, we can probably agree that for any prospective buyer today the speculative value of their limited edition watch doesn’t depend on the company continuing to exist during their lifetime.
The 100 years isn't the issue here, nor Rolex in particular. Replace Rolex with a contemporary brand and dcolkitt's point stands even more clearly. There is nothing in the law that makes a distinction between a Rolex watch and some other brand that people may purchase hoping it will garner prestige someday through present-day marketing efforts. It would be absurd to make that distinction.
The salient point is many things may be purchased for "speculative profit you hope to make [...] reliant on the business", but that by itself doesn't make them securities according to the law, so it's just not the right test to use.
A Rolex is a tangible art object that also performs a useful function. If, on the other hand, the issuing company sold NFTs with no tangible, functional, or aesthetic component and somehow sold people on the idea Rolex the company was going to pump these otherwise useless bits and bytes to the moon, then you're actually talking about something analogous to crypto.
There's literally nothing in existing law that identifies tangibility as a specific criteria for what constitutes a security and what constitutes a commodity. In fact both the CFTC and SEC are specifically on record as saying Bitcoin constitutes a commodity. And obviously Bitcoin is as intangible as it gets.
The Howey test's 4th prong refers to the value being derived from the work of others. When we're talking about a "commodity" that is intangible with no real-world application, function or value, respectfully those attributes are suggestive that the value derives from the "work of others." Maybe you and I and the SEC don't necessarily know the scope of the enterprise, but useless bits and bytes don't generally acquire value spontaneously so if one of them like ... XRP ... suddenly goes to the moon ... it certainly is suggestive because there's no other reasonable explanation.
The judge referenced the Howey case, saying that just because you have an investment contract involving an orange grove, that doesn't mean the orange grove itself is a security. A security is a contract, not just anything that people trade around in a speculative way.
> A security is a contract, not just anything that people trade around in a speculative way.
The scary thing IMO is that I think if you had enough big money trading bottlecaps or baseball cards, you'd quickly find them being considered a security.
But words have to mean something. Things can't just be a "security" because they make the government feel insecure.
>>Maybe it's explained better in the actual ruling, anyone have a link?
The docket[1] has the ruling[2], but there's very little additional detail provided beyond the focus on "blind transactions" to invalidate one of the Howey prongs[3].
As an aside, thank goodness for Court Listener and the RECAP/PACER archive!
This is IMO rather odd logic. I skimmed the opinion. If identical logic were applied to ordinary stock shares, it seems like it’s saying that shares in a C corp are securities if the C corp sells them to institutional investors, but that if the C corp sells the same shares by putting limit orders on a stock exchange (NASDAQ, for example) and Reddit-reading meme stock buyers buy them, then somehow the C corp didn’t actually engage in a sale of securities.
The holder of a stock certificate has a formal legal contractual relationship with the corporation that issued the stock. The holder of a token does not have a contractual relationship with the entity that issued the token.
Now there's probably some silliness in the fact that if Alice creates a token and sells it to Bob, it's an investment contract, but if Alice creates a token sells it to Mark the middleman who then sells it to Bob it's not an investment contract and therefore not covered by the SEC. But this really comes down to how Federalist society wing of judges have changed Constitutional law.
Up until about 20 years ago, if Congress passed a law that wasn't very well defined or left a loophole open, courts were generally willing to consider the original intent of the lawmakers and interpret the law relative in a commonsense way even if it went against the specific language used by Congress. Federalist Society judges would argue that courts should generally only apply the law as it's actually written (i.e. an investment contract requires an actual legal contract). The argument is that Congress is around and still exists and perfectly free and able to update the existing laws if they're unhappy with the wording or oversight of previous legislation.
This is a fundamental disagreement in Constitutional law. Should courts use commonsense interpretation of the meaning of the laws or should Congress itself, as the actual elected representative, be responsible for updating laws and courts just enforce the plain meaning. It's also tinted by the fact that Congress today has become hopelessly gridlocked and obstructionist, and we're largely incapable of passing sweeping legislation. So generally if you're not a fan of big government or regulation, you're going to be biased towards one view and vice versa.
I had a similar thought at first but then read the actual ruling and it made more sense and it all stems on the 3rd prong of the Howie Test. It states there needs to be a "reasonable expectation of profits derived from the managerial efforts of others" which a share of stock has via dividends, etc. regardless how it was acquired.
For XRP, there is no explicit rights to profits via the efforts of others via the instrument so you then have to look at the agreement made via the contract between the purchaser and the issuer.
On page 18 of the ruling it outlines this for Institutional Investors:
'''The third prong of Howey examines whether the economic reality surrounding Ripple’s Institutional Sales led the Institutional Buyers to have “a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.”... Based on the totality of circumstances, the Court finds that reasonable investors, situated in the position of the Institutional Buyers, would have purchased XRP with the expectation that they would derive profits from Ripple’s efforts. '''
However for "Programmatic Buyers" on exchange the ruling said:
'''Having considered the economic reality of the Programmatic Sales, the Court concludes that the undisputed record does not establish the third Howey prong. Whereas the Institutional Buyers reasonably expected that Ripple would use the capital it received from its sales to improve the XRP ecosystem and thereby increase the price of XRP, Programmatic Buyers could not reasonably expect the same.'''
So because there is both no expectation of profits tied to the managerial efforts of others, nor from the contract made by a buyer on exchange, the court ruled the 3rd prong does not apply. Stocks fail the first part of this.
> '''Having considered the economic reality of the Programmatic Sales, the Court concludes that the undisputed record does not establish the third Howey prong. Whereas the Institutional Buyers reasonably expected that Ripple would use the capital it received from its sales to improve the XRP ecosystem and thereby increase the price of XRP, Programmatic Buyers could not reasonably expect the same.'''
I don't get this - why were Programmatic Buyers buying it then? I would agree if Programmatic Buyers were buying XRP to immediately use to then buy pizza or whatever, but nobody in cryptoassets does this.
Every individual person buying XRP seems to me to be buying it for the same reason as the institutional investors.
Hmm, I guess that makes sense - I had forgotten that 'institutional investors' were probably buying direct from Ripple. But if I tie it back to stocks, I guess I see institutional investors here as the ones buying at IPO, but individual investors are buying from each other on an exchange are still buying 'securities', are they not? Maybe they just are not that analogous.
Not at all. The shares in a C-corp are securities because they will definitely pass the Howey Test. Also, stocks are considered securities by a statute. It is unclear whether XRP tokens themselves pass the Howey test. (I believe the Howey Test is extremely outdated and needs to be revamped, but that's a different topic.)
You can invest your money in extremely safe US treasuries yielding >5% right now. If you instead choose to invest in something that doesn't generate any income, it needs to generate a return some other way or you are losing money compared to the do nothing option of investing in risk-free assets.
>>[...] what changes should we expect to see in the short term?
The article mentions that since the company definitively sold unregistered securities to hedge funds and sophisticated buyers (without registering with the SEC), a jury will now/soon need to "decide whether or not Garlinghouse or Larson aided in the company's violation of the law."
Seems pretty clear cut that the company, and it's executives, will have further problems to tackle in the near future.
>>This is supposed to be pretty huge.
This could become much bigger if the SEC uses this enforcement as an example reference case for future actions against other token projects that followed a similar playbook over the past several years, assuming the case is kicked further up the court hierarchy on appeal.
> This could become much bigger if the SEC uses this enforcement as an example reference case for future actions against other token projects that followed a similar playbook over the past several years
There is no other project, not even a close one, who sold tokens worth almost $1b rewarding their execs, while offering no value whatsoever.
This is not a win for the SEC, this is the case they truly couldn't lose. Yes, they didn't lose everything but that was also not possible to begin with
Fair enough, forgot about that one... At least for EOS, that's a blockchain, and the token has a utility unlike XRP. Also in defence to the EOS foundation, which to me acts in good faith, it's block.one (the company at the origin of EOS) which pocketed the whole $4b
There are specific regulations that carve-out ways to sell unregistered securities to accredited investors. For example, Rule 504 and 506 under "Regulation D", but they have limits on the amount raised ($10mm for 504) or limits on solicitation, which perhaps Ripple did not adhere to? You also have to file a Form D to claim the exemption ahead of time, which perhaps they didn't do?
Many ICOs done in the US followed similar but even more refined legal rational
and it doesnt really matter if institutional sales are unregistered securities because there are many registration exemptions to rely upon for sales to institutional
EDIT: oh funny ... Reuters edited their title and removed "partial" :-)