An appeal from the U.S. Securities and Exchange Commission (SEC) in its lawsuit against Ripple Labs has the crypto markets worried about a negative setback.
However, famous crypto lawyer John Deaton thinks otherwise. He says the legal challenge would not no affect XRP holders or the market because of a lack of ground to do so.
Federal Judge Rules XRP Is Not A Security
Earlier this month, federal district judge Analisa Torres, who is preceding the Ripple Labs vs SEC case, ruled that the XRP token “is not necessarily a security on its face” except for instances when it is sold to institutions in order to raise capital.
The judge noted that the programmatic sales of XRP to public buyers through crypto exchanges and the distribution of the tokens to Ripple Labs employees did not constitute the sale of unregistered securities.
As a follow-up, the SEC stated in its filing in a separate case against Terraform Labs CEO Do Kwon that it has made an appeal to the decision made in the Ripple lawsuit. The request to review the ruling came after the disgraced founder of collapsed crypto project Terra/Luna expressed his intention to utilize the verdict from the XRP lawsuit as precedent to argue that digital assets should not be considered securities.
SEC Cannot Appeal The Decision On Grounds Of The Howey Test
In response to questions raised by investors, Deaton, who represents more than 75,000 XRP holders, explained the possible scenarios in which the judgment would eventually be summarized.
The lawyer explained that an appeal is first of all “not even close to being a setback” and it will take two years before a final verdict is issued by the court, until which the decision by Judge Torres will stand as law.
Judge Torres’s ruling said that the public sale of XRP tokens through exchanges fell short of passing the Howey Test, which is a methodology used to determine whether a financial transaction involving the sale of an asset qualifies as an investment. The asset will be considered a security under federal law if it is;
- An investment of money
- An investment in a common enterprise
- An investment that is to be derived from the efforts of others
Torres ruled that XRP cannot be considered a security because there wasn’t a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.
She further elaborated that public buyers of the token were not aware they were purchasing the asset from Ripple, preventing any expectation of profit from being linked to efforts by the creators of the XRP token.
According to Deaton, even if the SEC were to successfully challenge Torres’ Howey Test application on the front of programmatic sales, the judge’s ruling would still prevail because of other factors of the test such as “investment of money” and the “investment in a common enterprise”.
This would make it much harder for the SEC to appeal as the financial regulator will have to satisfy that a common enterprise existed under the Howey Test as opposed to proving that profit was derived from the efforts of others.
Deaton ended his tweet by encouraging XRP holders to not let anyone “underestimate” how significant “this win” is for XRP and Ripple.
Judge’s Decision “An Unequivocal” Win For The Entire Crypto Sector
Ripple CEO Brad Garlinghuse criticized the SEC’s attempts to be a regulator of digital assets, stating that the agency created “this mess” by proclaiming it was the authority without having any legal jurisdiction.
The executive tweeted that “legislation” and not more regulation by enforcement is the “ way forward to provide clear rules and protect retail.” He even called the Torres ruling “an unequivocal win” for XRP as well as the whole crypto industry in the United States.
Meanwhile, Ripple’s Chief Legal Officer Stuart Alderoty reiterated that a securities agency only has jurisdiction over securities and the SEC has no role if there are no securities involved.
He also added that “pretending to have jurisdiction” over something when there is none was simply a political power play, which benefits no one and only harms everyone involved.
Although Judge Torres’ ruling that XRP tokens are not securities when sold on crypto exchanges was favorable to Ripple, the company seemed to have broken rules when it attempted to raise capital by offering the tokens to hedge funds and other institutional investors.
Ripple has been tied up in a legal battle with the SEC since 2020 when the securities watchdog accused the company of raising $1.3 billion by selling XRP tokens, a transaction it considers an unregistered security offering.
At the time of writing, XRP is trading $0.71 – down 3.8% in the last 24 hours.
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