Crypto companies facing US SEC indictments are finding hope in the Ripple ruling, experts say

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Jul 17 (Reuters) – A cryptocurrency developer’s landmark legal victory against the US Securities and Exchange Commission (SEC) will prompt Coinbase (COIN.O) and other companies to oppose the agency’s attempt to extend its jurisdiction over industry, say experts.

Thursday’s ruling that Ripple Labs Inc did not violate securities laws by selling its XRP token on exchanges was the SEC’s first major setback in a decade of enforcement against the cryptocurrency industry. Other crypto companies accused of illegally operating digital asset exchanges are exploring ways to profit from the ruling, according to two sources familiar with the case who asked not to be named because they were not authorized to speak publicly. to speak.

The crypto industry is in a tug-of-war with the SEC and its Democratic chairman Gary Gensler, who has described the crypto market as a “Wild West” riddled with fraud. Saying most crypto tokens are securities, the SEC has cracked down on crypto trading platforms, including major US exchange Coinbase, in a bid to bring the industry under its scrutiny.

Crypto companies have long challenged the SEC’s jurisdiction, but until Thursday, no court had supported that view. Now industry lawyers have ammunition to fight back.

“This case will make people think again, and I think they already have,” said Robert Frenchman of Mukasey Frenchman LLP.

For example, the two sources said companies are considering ways to use the judge’s ruling for their defense. “I can’t imagine any of the exchanges won’t use this one way or the other,” one said.

In 2020, the SEC sued San Francisco-based Ripple and its current and former CEOs, alleging that they executed an unregistered $1.3 billion securities offering by selling XRP, which Ripple’s founders had in 2012 created.

U.S. District Judge Analisa Torres in New York ruled on Thursday that the sales on public cryptocurrency exchanges were not offers of securities because buyers did not have a reasonable profit expectation that depended on Ripple’s efforts, a key factor in determining whether XRP was an asset to the market. time. However, she also ruled that Ripple’s direct sales of XRP to investors should have been registered as securities, giving the SEC a partial victory.

Crypto proponents saw the decision as a watershed moment and the judge’s reasoning as a new line of defense for the likes of Coinbase, Binance, Bittrex and other exchanges targeted by the SEC for trading securities.

“It supports Coinbase and Binance’s arguments that the digital assets traded on those exchanges are not considered securities,” said Teresa Goody Guillén of Baker & Hostetler in Washington.

Spokesmen for Coinbase and Bittrex did not immediately respond to requests for comment. Binance declined to comment, as did an SEC spokesman.

The SEC’s Gensler said in remarks Monday that the regulator is “disappointed” with the portion of the ruling that favored Ripple.

SEC APPEAL?

As the cryptoverse celebrated, some legal experts said they believe the SEC will challenge the ruling in the 2nd U.S. Court of Appeals to prevent judges hearing other cases from ruling that other crypto assets sold on exchanges are not securities. are.

“The stakes are too high, especially in light of cases against Coinbase and other issuers for the SEC to hold this opinion,” said Carol Goforth, a law professor at the University of Arkansas.

Ripple Chief Legal Officer Stuart Alderoty said in an interview with Reuters that the company “wouldn’t shy away from an appeal because the judge was right on its core findings,” adding, “I believe any appeals court looking at this would strengthen and support those statements, which would certainly be welcome,” he said.

Experts agreed that an appeal carried risks for the SEC.

If the 2nd Circuit, whose rulings are binding on federal courts in New York, Connecticut and Vermont, adopts the logic of the Ripple ruling, much of the Coinbase case is “toast,” said Philip Moustakis, an attorney at Seward & Kissell.

“It poses a significant risk that their jurisdiction over the crypto markets will be limited if they appeal and lose,” he said.

Reporting by Jody Godoy and Chris Prentice in New York and Hannah Lang in Washington, DC; edited by Tom Hals, Michelle Price and David Gregorio

Our Standards: The Thomson Reuters Principles of Trust.

Jody Godoy reports on banking and securities law. Reach her at jody.godoy@thomsonreuters.com

Chris Prentice reports on financial crimes, with a focus on securities enforcement cases. She previously reported on commodity markets and trade policy. She has received awards for her work from the Society for Advancing Business Editing and Writing and the Newswomen’s Club of New York.


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