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Security token: the dispute between SEC and Ripple could escalate
Despite a clear ruling on XRP by a US judge, the SEC’s case against Ripple regarding the alleged security token nature of their cryptocurrency could end up escalating.
This is what Neel Maitra, former fintech and crypto specialist at the SEC, claimed during the Bitcoin For Corporations event by MicroStrategy held last week.
XRP as a security token? SEC again against Ripple
According to Maitra, it is not certain that the cause of the SEC against Ripple will end soon.
The expert on legal issues related to cryptocurrencies has pointed out how there are three judges with conflicting opinions on the matter.
The first is Judge Analisa Torres, who last year issued her ruling on the XRP case.
According to Judge Torres, primary transactions, when buyers purchase XRP directly from Ripple (the issuer), and secondary transactions, which occur anonymously on exchanges, should be considered separately. In the latter case, they should not be considered as security transactions, so XRP on exchanges cannot be considered a security token.
However, Torres has not yet commented on the accusation made by the SEC against Ripple for selling XRP as a security token on the primary market, so this issue is still open.
However, Maitra recalled that in two other cases, the SEC against Terra/Luna and Coinbase, judges Jed Rakoff and Katherine Polk Failla opted for a broader view, hypothesizing that the aggressive marketing strategies employed by crypto companies could influence both primary and secondary market transactions.
In this case, even crypto transactions on exchanges could potentially be classified as unregistered security transactions.
Regulatory uncertainty
All this reasoning revolves around regulatory uncertainty, as the USA still does not have any specific legal regulation governing the crypto markets.
Maitra points out that these divergent opinions among judges highlight that the regulation of cryptocurrencies should be full of nuances, and should have an evolving nature.
He added:
“It is inevitable that this [the Ripple vs SEC case] will end up in the second circuit and maybe even beyond, who knows, but there is still much to be done in this particular decision, just like with Coinbase”.
So according to the expert, who in the past has worked for the same SEC, the case will probably also reach the highest judicial authorities, because it is difficult to examine and in the absence of regulatory clarity on the matter makes the judges’ work particularly complex.
Furthermore, it reports that the SEC does not necessarily see the defeat in the case against XRP as a failure of its theory that even the secondary trading of cryptocurrencies would be trading in unregistered securities, but sees it only as a temporary failure for not having been able to present sufficient evidence to support their theory.
In light of this, it is possible that the SEC is preparing to present further evidence to try to resolve the issue in its favor on appeal.
The issue is still open
It should be added that the SEC’s case against Ripple is actually not closed yet.
Therefore, although the case against XRP has now been closed, the ones against Coinbase and Ripple remain open, and there is always the possibility that they may escalate to a higher level, even up to the appeal or beyond.
In other words, last year’s partial victory does not seem to be enough to consider the danger averted.
The fact is that if cryptocurrencies are recognized as securities, since they are not registered as such, they could not be legally traded on exchanges.
Actually, there seem to be no doubts about Bitcoin: it is not a security, and can be freely traded.
The problem lies with other cryptocurrencies, especially those that are presented to the markets as investment opportunities to generate profits, with the issuer promoting their sale with advertising and promotions.
If they are sold promising profits, as Ripple seems to have done during the early years of its cryptocurrency existence, it is difficult to argue that they are not implicit investment contracts, and since such contracts are effectively securities, cryptocurrencies that fall into this category could actually be considered unregistered securities.
The risk is therefore real, and partly seems to also concern Ethereum. It is possible that the SEC will reject the requests for the issuance of ETFs on Ethereum spot in the USA during this month of May, expecting the issue to then be brought to court and resolved by a judge.
However, this does not apply to Bitcoin, on which the SEC has never raised objections regarding its nature as a commodity.
Ripple’s response to the SEC on the nature of security tokens
Recently, Ripple’s CEO, Brad Garlinghouse, openly expressed his support for Ethereum, vehemently denying the idea that ETH and XRP should be considered securities.
During an interview with CNBC, he emphasized the differences between these cryptocurrencies and those securities that are commonly considered security, highlighting that the actual use of XRP, for example, as a means to facilitate cross-border payments is in stark contrast to the characteristics of securities.
So in fact Ripple continues to deny that the SEC may be right, but it will always and only be a judge who can decide how things really are.
It should be noted, however, that the situation could be greatly simplified in the event of direct intervention by the legislator, or the US Congress, which for some years now has been blocked by political issues regarding the new rules to be specifically applied to the crypto markets.
This is what Neel Maitra, former fintech and crypto specialist at the SEC, claimed during the Bitcoin For Corporations event by MicroStrategy held last week.
XRP as a security token? SEC again against Ripple
According to Maitra, it is not certain that the cause of the SEC against Ripple will end soon.
The expert on legal issues related to cryptocurrencies has pointed out how there are three judges with conflicting opinions on the matter.
The first is Judge Analisa Torres, who last year issued her ruling on the XRP case.
According to Judge Torres, primary transactions, when buyers purchase XRP directly from Ripple (the issuer), and secondary transactions, which occur anonymously on exchanges, should be considered separately. In the latter case, they should not be considered as security transactions, so XRP on exchanges cannot be considered a security token.
However, Torres has not yet commented on the accusation made by the SEC against Ripple for selling XRP as a security token on the primary market, so this issue is still open.
However, Maitra recalled that in two other cases, the SEC against Terra/Luna and Coinbase, judges Jed Rakoff and Katherine Polk Failla opted for a broader view, hypothesizing that the aggressive marketing strategies employed by crypto companies could influence both primary and secondary market transactions.
In this case, even crypto transactions on exchanges could potentially be classified as unregistered security transactions.
Regulatory uncertainty
All this reasoning revolves around regulatory uncertainty, as the USA still does not have any specific legal regulation governing the crypto markets.
Maitra points out that these divergent opinions among judges highlight that the regulation of cryptocurrencies should be full of nuances, and should have an evolving nature.
He added:
“It is inevitable that this [the Ripple vs SEC case] will end up in the second circuit and maybe even beyond, who knows, but there is still much to be done in this particular decision, just like with Coinbase”.
So according to the expert, who in the past has worked for the same SEC, the case will probably also reach the highest judicial authorities, because it is difficult to examine and in the absence of regulatory clarity on the matter makes the judges’ work particularly complex.
Furthermore, it reports that the SEC does not necessarily see the defeat in the case against XRP as a failure of its theory that even the secondary trading of cryptocurrencies would be trading in unregistered securities, but sees it only as a temporary failure for not having been able to present sufficient evidence to support their theory.
In light of this, it is possible that the SEC is preparing to present further evidence to try to resolve the issue in its favor on appeal.
The issue is still open
It should be added that the SEC’s case against Ripple is actually not closed yet.
Therefore, although the case against XRP has now been closed, the ones against Coinbase and Ripple remain open, and there is always the possibility that they may escalate to a higher level, even up to the appeal or beyond.
In other words, last year’s partial victory does not seem to be enough to consider the danger averted.
The fact is that if cryptocurrencies are recognized as securities, since they are not registered as such, they could not be legally traded on exchanges.
Actually, there seem to be no doubts about Bitcoin: it is not a security, and can be freely traded.
The problem lies with other cryptocurrencies, especially those that are presented to the markets as investment opportunities to generate profits, with the issuer promoting their sale with advertising and promotions.
If they are sold promising profits, as Ripple seems to have done during the early years of its cryptocurrency existence, it is difficult to argue that they are not implicit investment contracts, and since such contracts are effectively securities, cryptocurrencies that fall into this category could actually be considered unregistered securities.
The risk is therefore real, and partly seems to also concern Ethereum. It is possible that the SEC will reject the requests for the issuance of ETFs on Ethereum spot in the USA during this month of May, expecting the issue to then be brought to court and resolved by a judge.
However, this does not apply to Bitcoin, on which the SEC has never raised objections regarding its nature as a commodity.
Ripple’s response to the SEC on the nature of security tokens
Recently, Ripple’s CEO, Brad Garlinghouse, openly expressed his support for Ethereum, vehemently denying the idea that ETH and XRP should be considered securities.
During an interview with CNBC, he emphasized the differences between these cryptocurrencies and those securities that are commonly considered security, highlighting that the actual use of XRP, for example, as a means to facilitate cross-border payments is in stark contrast to the characteristics of securities.
So in fact Ripple continues to deny that the SEC may be right, but it will always and only be a judge who can decide how things really are.
It should be noted, however, that the situation could be greatly simplified in the event of direct intervention by the legislator, or the US Congress, which for some years now has been blocked by political issues regarding the new rules to be specifically applied to the crypto markets.
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