On Friday (October 28), Jake Chervinsky, who is Executive Vice President and Head of Policy at Blockchain Association, Advisor at Variant Fund, and Board Member at DeFi Education Fund, explained why the U.S. SEC’s views are “wrong as a matter of law and policy.”

As you may remember, on 22 December 2020, the SEC announced that it had “filed an action against Ripple Labs Inc. and two of its executives, who are also significant security holders, alleging that they raised over $1.3 billion through an unregistered, ongoing digital asset securities offering.”

Yesterday, the Washington, D.C. based Blockchain Association (which represents “the reputable leaders of the US blockchain and cryptocurrency industry”) filed an amicus brief supporting a correct interpretation of Howey” in the SEC’s ongoing lawsuit against Ripple.

In its press release, Blockchain Association stated that “this case, which is just one in a long line of SEC efforts to regulate by enforcement, highlights the SEC’s efforts to cement and legitimize its overly broad interpretation of the Howey test” and that “a ruling that adopts the SEC’s view of the law would expand the landscape of assets that are considered securities in a manner contrary to the Supreme Court’s intent in Howey.”

Kristin Smith, Executive Director of Blockchain Association, had this to say:

The SEC’s broad, haphazard interpretations of the securities laws currently stand as the single greatest threat to the future of this rapidly growing industry. By erratically applying these outdated standards to a modern and innovative technology, the SEC continues its ‘regulation by enforcement’ pattern, punishing crypto companies with little justification or warning. 

This is exactly the case with Ripple, which the SEC targeted nearly two years ago in an enforcement action alleging that the crypto company had failed to register a digital token as a security. The SEC must follow the law, they cannot impose their draconian view on the entire crypto ecosystem through an enforcement action. 

Ripple’s decision to fight this case in court provides an opportunity for the industry to push back against the SEC’s regulation by enforcement agenda and open the door to modernized standards for the industry.

In a Twitter thread posted yesterday, Chervinsky said that in Blockchain Association’s 30-page brief they explain in detail why the SEC’s views “are wrong as a matter of law and policy.”

Here are a few highlights of why Blockchain Association believes that the SEC’s interpretation of the Howey test in this case is wrong:

The fatal flaw in the SEC’s position is its failure to distinguish primary sales from downstream transactions in the secondary market. The SEC ignores the difference between promises that go along with a token sale (maybe a security) and the token itself (never a security).

As a result, the SEC doesn’t seem to even bother analyzing whether secondary sales of XRP qualify as securities transactions, despite alleging violations through present day. Instead, the SEC apparently takes the position ‘once a security, always a security, no matter what.’

The SEC instead relies on an extremely broad view of Howey, far beyond what the law supports. The SEC takes a test meant to define a specific type of relationship between transacting parties and reimagines it to capture basically every asset in the world with a market price… Seemingly to justify expanding its own authority over crypto as much as possible, the SEC stretches all four prongs of Howey beyond the limits of logic and legal precedent.

Chervinsky ended his Twitter thread by saying:

I wish the SEC would take more sensible positions on crypto, but until then, there’s sadly no choice but to fight this out in the courts. This case could result in important precedent affecting the whole industry. I hope our brief helps the court get the law right.

In a recent interview, Deborah McCrimmon, who is Vice President of Litigation and Employment at Ripple, talked about this lawsuit.

Ripple’s Deputy General Counsel, who joined Ripple as employee #210 (Director of Litigation) around August 2018, made her comments during an interview that was published in Modern Counsel on 17 October 2022. Below are a few highlights from that interview:

  • I learned about Ripple and all their big goals of trying to improve and build and achieve this internet of value. That resonated with me. I wanted to be a part of that.
  • We have been litigating with the SEC on that issue since late 2020, and we believe strongly that the SEC is wrong on both the facts and the law.
  • They are reaching far beyond the authority that was granted to them by Congress and trying to regulate a space that Congress never intended them to regulate.
  • It’s a cutting-edge, industry-defining case. It’s going to be precedential, not just for Ripple, but for the entire crypto industry. It’s being watched by the entire industry.

Image Credit

Featured Image via Pixabay