SEC Seeks to Appeal Ruling That Ripple XRP Isn’t a Security

The US Securities and Exchange Commission said it intends to challenge a federal judge’s ruling that Ripple Labs Inc.’s XRP token isn’t a security when sold to the general public.

(Bloomberg) — The US Securities and Exchange Commission said it intends to challenge a federal judge’s ruling that Ripple Labs Inc.’s XRP token isn’t a security when sold to the general public.

US District Judge Analisa Torres in New York last month said the crypto firm’s sales of XRP to sophisticated investors met the test for an investment contract under federal securities law because those buyers “would have understood that Ripple was pitching a speculative value proposition for XRP with potential profits.” But the judge said that didn’t apply to programmatic investors, meaning the broader public buying crypto on exchanges. 

Whether cryptocurrencies are securities has long been a major question hanging over the industry, which has argued it’s not subject to the jurisdiction of the SEC and other regulators. The Ripple case is one of several that have placed the issue before judges, resulting in “varying decisions,” according to the SEC. 

The agency on Wednesday told Torres it plans to seek permission to promptly appeal her ruling to the 2nd US Circuit Court of Appeals, saying a timely review is warranted because of the “number of actions currently pending that may be affected” by the way the appellate court decides. A ruling from the court could resolve legal questions and provide a measure of consistency to lower-court decisions.

Lawyers for Ripple Labs didn’t immediately respond to emails seeking comment on the move by the SEC.

The ruling in Ripple’s favor as to retail sales involves “‘controlling’ questions of law because they disposed of the SEC’s claims regarding defendants’ offers and sales at issue,” the SEC said, and resulted in dismissal of claims involving more than half of XRP offers and sales.

The dispute raises important enforcement issues for the agency in many pending cases, including one recently brought against Coinbase, according to the filing. In that suit, the SEC claims Coinbase is illegally operating an unregistered securities exchange, broker and clearing agency. Coinbase last week asked a judge to dismiss the case, citing the Ripple decision.

Read More: Crypto Surges and Sinks on the Words of Two New York Judges

The SEC said an appeal could also affect its suit accusing crypto exchange Binance Holdings Ltd. and its Chief Executive Officer Changpeng Zhao of violating securities laws, mishandling customer funds and misleading investors and regulators. 

Because Torres’s ruling didn’t end the Ripple case, the SEC needs her permission to seek immediate review from the appeals court. The agency will have to persuade the judge that the decision involves “a controlling question of law,” that there is “substantial ground for difference of opinion” and that an immediate appeal may speed up the litigation. 

The SEC noted that one judge in the same courthouse expressly rejected the approach taken by Torres. In the regulator’s case against Terraform Labs Pte and its co-founder, Do Kwon, US District Judge Jed Rakoff ruled that the company’s Terra USD token may indeed be a security when sold to retail investors.

An appeal could postpone a potential trial in the Ripple case by months, though the SEC argued it would be quicker to resolve the legal issues now rather than after a final decision in the trial court.

XRP fell as much as 4.3% before paring some of the drop to trade at about 64 US cents as of 10:17 a.m. in Singapore on Thursday.

The case is SEC v. Ripple Labs Inc., 20-cv-10832, US District Court, Southern District of New York.

–With assistance from Allyson Versprille.

(Updates with the XRP token’s drop in the penultimate paragraph.)

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