According to crypto attorney John Deaton, the Securities and Exchange Commission’s (SEC) appeal in its case against Ripple Labs does not represent a major blow to Ripple’s recent court win.
“An appeal is nowhere near a setback,” Deaton said calledto counter a claim on Twitter. “Let no one underestimate the importance of this win.”
Deaton’s comments came after Federal District Judge Analisa Torres ruled earlier this month that XRP, the token that powers Ripple’s payments network, “is not necessarily a security on the face of it” — except in cases where it has been sold to institutions to raise funds.
Ripple has been in a legal battle with the SEC since 2020, when the regulator accused Ripple of raising $1.3 billion in unregistered securities offerings.
SEC Chairman Gary Gensler said he was “disappointed” with aspects of the decision that could have far-reaching implications for other tokens that are under regulatory pressure. Court documents filed by federal regulators in their case against Terraform Labs on Friday suggest the Ripple case could soon be appealed.
Even then, according to Crypto Law founder Deaton, it would take a significant amount of time for the appeal to make its way through the court system.
“It will be two years before the 2nd Circuit makes a decision,” Deaton said. “Until then, the Torres decision applies.”
Torres ruled that the programmatic sale of XRP to public buyers failed the Howey test — a method of determining whether an investment treaty exists when an asset is sold — because “there is no reasonable expectation that profits will be realized from the corporate or managerial efforts of others.”
Public buyers of XRP were unaware that they were buying Ripple’s token due to the structure of programmatic sales, so no expectation of profit could be attached to Ripple’s efforts, Torres explained in her decision.
“It certainly may be that many programmatic buyers bought XRP with an expectation of profit, but they didn’t derive that expectation from Ripple’s efforts,” Torres said. “None of the programmatic buyers knew they were buying XRP from Ripple.”
Even if the SEC were to successfully challenge Torres’ use of the Howey test on this front, Deaton said, considering the other factors of the Howey test, such as “cash investment” and the existence of a “common entity,” Torres could still decide in the same way.
Deaton claimed that it would only present a bigger challenge for the SEC. It is much more difficult for the SEC to convince that a joint entity existed after the Howey test than expecting a gain from the efforts of others, he said.
Ripple CEO Brad Garlinghouse, who called the Torres ruling “a clear victory for Ripple and for crypto in the US,” commented separately on the SEC’s attempts to become the leading regulator of digital assets.
“The SEC caused this mess by proclaiming they were the bull in crypto fraud when they had no jurisdiction,” he said tweeted. “We all know that legislation – no more regulation through enforcement – is the only way to set clear rules and protect retail.”
“A securities agency only has securities jurisdiction — no security, no role for the SEC,” responded Stuart Alderoty, Ripple’s chief legal officer. “Pretending to have jurisdiction when there is none is simply a political power play. It doesn’t help anyone, it harms everyone.”