The Ripple case shows how the Howey test for evaluating cryptocurrency projects is unpredictable.
Ripple’s victory could be temporary and it could lose if the SEC files an appeal.
In light of the events, Ripple Labs won a partial victory in its lawsuit against the US Securities and Exchange Commission (SEC) and in the process being conducted to determine whether the XRP token is a security . (security) or a basic product (commodity).
Following the decision of Judge Analisa Torres of the Southern District of New York, The XRP token issued by Ripple was a security when it was sold to institutional investors already venture capitalists; and therefore it was traded illegally because it was not registered.
On the other hand, the order The law, issued by the judge on July 13, also applies to “programmatic” sales, meaning trading the XRP token on the secondary market, meaning exchanges, direct sales, or when it was used to pay employees.
According to the court in In these cases of retail sales, Ripple’s crypto asset cannot be considered collateraland therefore is not regulated by the SEC.
With that in mind, it is understood that Ripple has not achieved a definitive victory up to this point in the process, although it has not lost either. Simply A victory has been achieved at an important stage in a legal battle that may be far from over.
In fact, the federal district judge, in noting Thursday’s filing, is making it clear that the court will schedule a hearing to resolve the questions left unanswered in the summary judgment.
And as the time comes to define the next stage, many members of the cryptocurrency ecosystem are trying to understand how a token can be considered collateral… only sometimes?
David Barrera, an active participant in the cryptocurrency ecosystem, Catalog as “strange” the court ruling in the Ripple case. “Judge Torres tried to split up the baby in such a way that no one was satisfied,” he adds.
Barrera is referring to the verdict that the court issued last Thursday does not appear to have any material impact on the “litigate to regulator” strategy that the SEC has pursued to date.
The crux of the matter is probably that the regulator uses the Howey test, which feeds into the classification of financial value, to determine whether digital assets are offered and sold as an investment contract.
According to this test, which was made in 1946, i.e. 77 years ago, A cryptoactive is a financial security if it meets the following criteria: It is a cash investment, it is part of a common enterprise and there is a reasonable expectation that the efforts of others will yield returns.
In this sense, when assessing Ripple’s institutional sales, the court in its judgment evaluated the Howey test as follows:
- Principle one: With regard to the existence of an investment, the court points out that “The defendants do not deny that it was a monetary payment; The court therefore finds that this element has been established.”
- Point two: Regarding the existence of a common society, the court pointed out that there is such a thing because “The file shows that it was a combination of assets and that the fate of institutional buyers depended on the success of the company as well as the success of other institutional buyers.
- Point three: Regarding the reasonable expectation of reaping profits from the efforts of others, the court found that Ripple’s institutional sales resulted in buyers “a reasonable expectation of returns from business ventures or the management of others”.
“Based on the totality of the circumstances, the court concludes that reasonable investors in the position of institutional buyers would have bought XRP expecting to benefit from Ripple’s efforts. In every case where the defendants offered or sold XRP as an investment contract, a contract existed.”
Judge’s decision in summary judgment of Thursday 13 July.
There is no victory for Ripple as the legal battle is far from over
As CriptoNoticias previously reported, the Howey test does not apply to all cases, although the SEC insists on using it as a guide to verify that most cases are present Crypto assets, except Bitcoins and ether are financial instruments and should be regulated as such.
The SEC’s position applies primarily to most tokens originating from ICOs (initial coin offerings), but Howey’s test on whether tokens qualify as securities or not isn’t entirely convincing. Especially given the different positions of other federal agencies in the United States.
The Ripple case underscores this Limits of the Howey test to classify crypto assets as securities or not, especially since the SEC has already established that all tokens are securities.
In summary, the Howey test states that a contract or plan involving the investment of funds in a common enterprise with a reasonable expectation of a return from the entrepreneurial or managerial efforts of others is a legal act.
This type of contract is known as an “investment contract” and is under the Federal Securities Act of 1933 is regulated in the same way as a value.
However, regarding Ripple’s programmatic XRP sales, the court noted that “the programmatic buyers could not know whether their cash payments went to Ripple or another XRP seller.” Adding that “one programmatic buyer was in the same position.” like an aftermarket buyer who doesn’t know who they’re paying their money to.”
The court added that “programmatic buyers acquired XRP with an expectation of profit, but did not derive that expectation from Ripple’s efforts, particularly because none of those buyers knew they were acquiring XRP from Ripple.”
But the Ripple case alone provides no regulatory or legal clarity to the myriad of other regulatory issues grappling with the U.S. cryptocurrency ecosystem. Given these loopholes, the SEC is likely to appeal the judge’s decision, and if so, It would become clear that the legal battle between Ripple and the SEC was just beginning.