The recent ruling in the SEC vs. Ripple case has stirred up a whirlwind of interpretations, misinterpretations, and downright confusion. Enter Michael Selig, Counsel at NYC-based law firm Willkie Farr & Gallagher LLP, who’s taken to the Twitterverse to set the record straight.
Contrary to what some commentators have been suggesting, Selig explains that Judge Analisa Torres did not rule that XRP is a security when sold to institutional clients and not a security when sold to retail investors. Instead, her ruling was that XRP itself is not a security, but it can be part of a security offering.
Selig likens XRP to a fungible commodity, such as gold or whiskey, which can also be part of investment schemes that fall under securities laws. These schemes, whether sold to institutions or retail investors, implicate securities laws if they meet the criteria of the Howey test. This legal test is used to determine whether a transaction constitutes an investment contract in the U.S.
The court’s role, as Selig points out, is to determine whether there is a contract, transaction, or scheme where a person invests money in a common enterprise and expects profits based on the efforts of others. Judge Torres concluded that there were insufficient facts regarding certain sales of XRP to meet this test.
Selig also addresses criticisms of the ruling, stating that it’s challenging to pinpoint how Judge Torres may have misapplied the law. He notes that there’s no legal precedent supporting the view that a commodity can embody a security. Other courts have similarly reasoned that crypto assets are not contracts, transactions, or schemes and cannot be investment contracts.
Selig’s tweets also highlight a significant regulatory gap concerning crypto assets. He suggests that the ruling indicates that most transactions involving crypto assets are unlikely to fall under securities laws. To address this regulatory gap, legislative action would be needed, potentially involving expanding the SEC or CFTC’s authority to develop new crypto asset regulations.
The SEC, according to Selig, prefers the narrative of crypto assets being securities when sold to certain investors because it smooths over the regulatory hole that results from the investment, contract, or scheme being the security rather than the token. However, without legislation, the SEC lacks jurisdiction.
John Deaton, a prominent highly-respected attorney closely monitoring the U.S. SEC’s lawsuit against Ripple, responded to Selig’s comments. Deaton, Managing Partner of Deaton Law Firm, is the founder of CryptoLaw. He expressed surprise at the number of people, including financial commentators, who continue to misstate Judge Torres’ decision. Deaton questioned whether this misinterpretation was due to genuine confusion or an intentional effort to promote a false narrative.