Ripple’s Call to Action: Demanding Legislative Clarity Amidst SEC's Enforcement Chaos

It has been just two weeks since the United States (US) District Judge Analisa Torres ruled in favour of Ripple in the lawsuit filed against it by the US Securities and Exchange Commission (SEC) in December 2020.

The SEC's allegations against Ripple were substantial, claiming that the company had amassed a staggering $1.3 billion by selling XRP to investors, arguing that these transactions should be regarded as securities. However, upon closer examination, the court made a crucial observation: programmatic XRP sales did not fit the criteria of investment contracts. The court emphasised that these sales lacked the economic essence of institutional transactions, leading to a pivotal finding. In essence, the court assessed the situation, considering whether there was a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.

Objectively, it is a partial victory for Ripple. That means it is also a partial win for SEC.

Victim No More, Ripple’s Turn to Heat Things Up
After being on the defending side for years, Ripple finally caught a much-needed breather with this victory (partial or not) and has been throwing shade at SEC ever since.

Just a day after securing what they deemed as a significant legal victory in an ongoing dispute, Ripple Labs CEO Brad Garlinghouse made a bold statement, branding the SEC as a "bully," and saying that the SEC has created a “mess”. In an interview with Bloomberg, he expressed, “I think the SEC has been a bully, and they’ve gone after weak players who couldn’t mount a proper defense.”

In a recent Twitter critique, Brad launched a sharp rebuke at the US regulator, raising pressing concerns about safeguarding retail investors in the cryptocurrency space. He expressed that the current chaos enveloping the crypto industry is, in large part, a consequence of the SEC exceeding its legal boundaries and asserting control over cryptocurrencies without proper jurisdiction.

He went on to highlight how the SEC's overreach has left consumers in a perilous state, struggling with financial distress while the agency's actions appear limited to holding conferences. This vivid portrayal of the plight faced by consumers emphasises the urgency of regulatory clarity and the need for a balanced approach to protect investors without stifling innovation.

Moreover, the Ripples’ CEO drew attention to what he views as an absurdity: placing blame on a US judge for a ruling that XRP is not a security. His pointed remark sheds light on the intricate legal intricacies involved in defining cryptocurrencies and reinforces the importance of legal clarity in an ever-evolving digital asset landscape.

Stuart Alderoty, Ripple's CLO, added his perspective to the discussion, emphasising a crucial point about the SEC's jurisdiction. According to him, the SEC's authority is confined to securities, and any attempts to exert control over non-securities ventures could be perceived as a political manoeuvre rather than a genuine effort to protect investors, It helps no one; it hurts everyone.” His argument raises thought-provoking questions about the regulatory landscape's boundaries and the potential consequences of overstepping them.

Offering a distinct perspective, John E Deaton, the Founder of Crypto-Law.us, has come forward to defend Judge Analisa and her recent ruling. He contended that the judge's role was to apply a test dating back to 1946 to assess modern-day blockchain technology, and she diligently fulfilled her duty in doing so. He astutely highlighted a key aspect ─ the criticism directed at the ruling may, in fact, arise from the mismatch between an outdated security contract test and the dynamic landscape of contemporary technology. John pulls no punches when assigning responsibility for the current situation, firmly placing the blame on the SEC.

Yet another astute observer highlighted a fundamental disparity between cryptocurrencies and the realm of traditional securities and banking regulations. This individual emphasised the urgent necessity of fostering innovation in the crypto space. To achieve this, they advocated for legislative changes and the establishment of regulatory sandboxes.

What Should SEC do Next?
A few days back, lawyer James Murphy took to Twitter to outline four options that the SEC might consider in response to the recent ruling concerning XRP, “There’s a lot of debate about what the SEC will do next in the Ripple case. I believe there are at least 4 options under consideration,” stating that the first option is for SEC to file a “request for interlocutory appeal.”

In his opinion, it is in the best interest of Ripple and the XRP community for the SEC to start the appeal process now, “I expect the SEC to file a request for interlocutory appeal within the next two weeks.”

“Because no final judgment has been entered yet, the SEC doesn’t have the unilateral right to appeal now. It would need permission from both Judge Torres & the 2^nd Circuit Court of Appeals to proceed with an interlocutory appeal.”

In providing insights on the potential interlocutory appeal by the SEC, James outlined three essential criteria that the regulatory body would need to meet. Firstly, the SEC must demonstrate that the recent ruling involves a pivotal question of law, exerting a significant impact on the case. Moreover, the regulator must establish that there are substantial grounds for a difference of opinion on this matter, hinting at the potential for diverse legal interpretations. Lastly, the SEC must make a compelling case that an immediate appeal could materially advance the progress of the litigation.

Although there is no set deadline for the initial appeal request, he underscored the importance of prompt action, recommending that it should typically occur within 30 days. Once the request is made, Judge Analisa will consider the SEC's arguments. If she agrees, the SEC will then have a 10-day window to approach the 2^nd Circuit Court of Appeals.

The lawyer went on to elaborate on the other three potential options the SEC could pursue. In the second scenario, the SEC would opt for a trial on the aiding and abetting claim against Ripple CEO Brad Garlinghouse and co-founder Chris Larsen. Subsequently, the regulatory body would file a regular appeal following the trial. The third option entails the SEC dropping the claims against Brad and Chris immediately and proceeding with an appeal without requiring permission.

The fourth option on the table for the SEC is to reach a settlement. Among these possibilities, the lawyer opined that the SEC is likely to favour the first option for two compelling reasons. Firstly, there is significant political pressure on SEC Chair to swiftly reverse the XRP ruling decision. Secondly, the ruling casts a foreboding shadow over the SEC's cases involving various cryptocurrency exchanges such as Coinbase, Binance, and Bittrex.

“The political considerations are important. Crypto exchanges around the world are re-listing XRP — making the SEC look bad. Progressive Congressman Ritchie Torres & others have been emboldened to amp up criticism of Gensler. This is all embarrassing for Gensler & his allies.”

James believes it is “unlikely at this point” with regard to then settlement option, “It’s hard to imagine the SEC settling with Ripple and leaving the Torres precedent untested on appeal. The SEC’s whole ‘regulation-by-enforcement’ program against the crypto industry hinges on getting Torres reversed.”

What Will the Future Hold?
Undoubtedly, the recent court ruling in favour of Ripple's XRP has brought a sense of relief to the crypto sector. However, amidst this glimmer of hope, the regulatory landscape continues to be shrouded in uncertainty. The SEC's indication of a possible appeal adds a twist to the unfolding narrative, as the agency contends that the court's decision contradicts fundamental principles of securities laws, exemplified by the Howey test. Although SEC Chair Gary Gensler declined to say if the agency will appeal the ruling; he has skillfully evaded this question so far.

And Ripple’s CEO call for regulatory restraint echoes across the crypto community, one cannot help but wonder about the delicate balancing act faced by regulators in overseeing this fast-paced industry. Could an overreach by the SEC inadvertently hinder innovation and create unnecessary obstacles for businesses in the crypto space? How can the delicate balance between regulatory oversight and fostering a thriving industry be achieved?