Ripple vs SEC ruling further confuses regulation ── Problems with ruling and possibility of overturning by appeal | CoinDesk JAPAN

Legally speaking, what are crypto assets (virtual currencies) that are sold to the public?

The US Securities and Exchange Commission (SEC) and Ripple Labs case follows a shocking ruling on July 13 by Judge Analisa Torres of the Southern District of New York. The answer is that XRP (XRP) is an illegally sold investment contract when sold to VCs and institutional investors, but when sold through cryptocurrency exchanges, employees and internal If distributed to the relevant parties, it seems to be a completely legal “other thing”.

As such, the only thing this ruling can assure cryptocurrency issuers is that there will be continued uncertainty in the cryptocurrency market.

At issue in this case was Ripple Labs’ ten-year Whether a token transaction constitutes a sale of securities because it is an “investment contract”.

Briefly, the Howie test is a contract that involves (1) a reasonable expectation of profit arising from the entrepreneurial or managerial endeavours of others, (2) a common undertaking, and (3) an investment of money. , the transaction or scheme is legally called an “investment contract” and is regulated like a security under the Federal Securities Act of 1933.

In the Ripple Labs trial, in order to conduct an analysis based on the Howie test, Ripple’s token sales were divided into (1) sales to institutional investors such as hedge funds and VCs, and (2) individual investors on digital asset exchanges. and (3) sales as a “form of consideration for services,” such as limited token purchase agreements and option agreements to employees and other service providers.

Ripple Loses Lawsuit in “Sale to Institutional Investors”

In the first category, “institutional sales,” Ripple lost. Few legal commentators I have seen argue that the court should have decided differently.

…but wins in programmatic sales

For the second sales category, “programmatic sales,” the court ruled in Ripple’s favor, stating that it did not meet the Howie test requirement of “profit expectations.”

“Ripple’s programmatic sale is a blind bid/ask transaction,” and “the purchaser of the programmatic sale must know whether the payment goes to Ripple or to another seller of XRP.” “The purchasers of such programmatic sales were in the same position as secondary market buyers who did not know who they were paying their money to,” the court said.

As a result, the court concluded that “the purchaser of the programmatic sale purchased XRP with the expectation of making a profit (rather than other factors such as trends in the cryptocurrency market as a whole). No, especially since none of the purchasers of the programmatic sale were aware that they were buying XRP from Ripple.”

Is this the right decision?

On this point the Court is clearly erroneous for one simple reason. That is, the profit expectation requirement does not require the expectation of profit as a result of the seller’s efforts, but rather the efforts of others, “promoters or third parties,” as the Howie Test puts it. As anyone active in the industry should know, the primary promoter of XRP has always been Ripple Labs, regardless of whether the buyer knew they were buying tokens from Ripple Labs. .

As for why the U.S. District Court for the Southern District of New York is wrong, the 2020 grant of the SEC’s motion for a preliminary injunction in the form of a landslide victory over the messenger app Telegram and its blockchain development subsidiary. The judgment will make it clear.

In the ruling, Judge Kevin P. Castel, who recently became famous for criticizing several attorneys who used ChatGPT to write answers, said that buyers should not expect profits. It attributed it to “the intrinsic entrepreneurial or managerial efforts of Telegram” and not to the entrepreneurial or managerial efforts of the intermediaries who were selling Telegram’s SAFT contracts to everyone at the time. .

The court determined that it was “Telegram’s commitment to develop the project,” rather than the intermediary seller’s resale efforts, that constituted “substantial efforts of others” in the Howie test requirements. Therefore, I believe that Ripple’s victory on this point will be overturned on appeal.

…And Weirdly, Ripple Also Wins For “Other Distributions” Of XRP

Finally, and most bizarrely, Ripple won because “other distributions” to employees and others did not meet the Howie test requirement of “monetary investment.” This is really hard to understand.

As is clear from case law, the “investment of money” in the Howie Test need not actually involve the movement of funds, rather the buyer “has some tangible, tangible This is because it only requires that the consideration has been renounced.

However, the court stated that Ripple’s “other distributions” “included distributions to employees as rewards and[…]distributions to develop new applications of XRP,” which are essentially any Even in a commercial environment such as Nonetheless, it concluded that there was no necessary contractual consideration and that no “tangible or tangible consideration” had been paid to Ripple.

Having employees provide services or develop applications for use on the protocol by third parties is not legal, given the large sums of money and cryptocurrency tokens routinely paid to them. For me, it’s very tangible and measurable.

This decision was probably erroneous and could be challenged on appeal.

Schrödinger’s grass coin

As such, the legal status of XRP seems to have some kind of duality. In other words, it’s not “Schrodinger’s cat”, but “Schrodinger’s grass coin”. It is a security if it is sold to an institutional investor in a primary sale, but it is not a security if it is sold anonymously on a cryptocurrency exchange or in exchange for a service to a related party.

Such a view seems highly unsatisfactory from the point of view of regulatory coherence. No other security magically transforms from a security to a non-security after being sold multiple times. Also, the application of the body of precedents related to the Howie test’s first and third requirements is plainly erroneous, given the whole set of reasons why XRP buyers are buying.

Token issuers in the American market have been presented with two main paths ahead. SEC’s Bill Hinman inadvertently devised a “sufficiently decentralized” standard for token issuance that led to the launch of numerous ICOs (and subsequent harsh rulings by district courts across the country). did) looks like 2017.

The first way is for unfit regulation to remain unchanged and new token issuers take advantage of this narrow (and arguably wrong) ruling to launch new programmatic token schemes. Enforcement action will be taken against such schemes within ~3 years, causing widespread damage to America’s economy, investors, and innovation.

Startups choosing this path should exercise extreme caution. As my colleague Stephen Palley put it, “The Ripple decision is a partial summary judgment by one district court judge. It’s not a precedent, it’s likely to be appealed, it can be overturned, and you shouldn’t act recklessly on the basis of that decision.”

Second, the US Congress realized that it was not reasonable for a thing to be a security in one transaction but not in another, and as Britain now does, Pass legislation to normalize cryptocurrency investment.

1933 to give all token trading a well-defined legal status, mandate a proactive disclosure regime, and regulate tokens without contractual promises in the same way that contractual commodities are regulated abolish the requirements of the Securities Act of 2008.

Conclusion

Ripple’s token sale business should be legal in the US, within regulatory guardrails. As it stands, that is not the case. In my view, Judge Torres’ ruling of lawfulness is likely to be overturned on appeal.

My hope is that Congress will brace itself and decide that it is time for crypto assets and crypto exchanges to have a dedicated disclosure and oversight framework. As such, crypto regulation would move away from the lengthy and contradictory process of courts and the politically driven SEC and into a more laissez-faire fashion, such as that permitted in jurisdictions such as the United Kingdom. It will be possible to proceed with the crypto asset business in the United States.

But my expectations of Congress are extremely low. I hope to be proven wrong on this one.

｜Translation and editing: Akiko Yamaguchi, Takayuki Masuda
｜Image: CryptoFX / Shutterstock.com
｜Original: Ripple Labs Ruling Throws US Crypto-Token Regulation into Disarray