A judge has denied a motion filed April 11 by the Securities and Exchange Commission (SEC) to clarify the contents of several emails and internal communications regarding the classification of Ethereum and XRP digital assets for the upcoming Ripple Labs lawsuit. This may seem like a small defeat for the regulator, but it may have implications not just for this case, but for the entire cryptocurrency community.
The SEC has almost exclusively used enforcement powers against token issuers to encourage them to register their digital assets as securities. Yet, since there is no specific rule to determine which digital assets (e.g. cryptocurrencies, tokens, stablecoins, etc.) are considered securities, the number of disputes has increased. Many of these cases go unnoticed because the parties reached an amicable solution, but the case with Ripple Labs may have lasting consequences.
The SEC used the “Howey” test, which defines what an investment contract is, to defend that most digital assets are securities and therefore fall under its oversight. According to the Howey test, adopted by the United States Supreme Court in 1946, an investment contract exists if there is an “investment of money in a joint enterprise with a reasonable expectation of profits to be derived from the efforts of others”.
Therefore, if digital assets, whether cryptocurrencies or tokens, are used as an investment contract, they may qualify as a security, and the SEC may require disclosure and disclosure requirements. registration under the Securities Act of 1933 and the Securities Exchange Act of 1934. This is exactly what the SEC argues in its enforcement actions, and in particular in its lawsuit against Ripple, that a digital coin like XRP is a security, not a means of payment, and that the business should have recorded the asset. However, if the digital asset is used as currency or as a commodity, these requirements do not apply. Ripple claims that XRP is exempt from these federal laws.
At the heart of this litigation is the question, as yet unanswered by the SEC or any other agency, of whether cryptocurrencies are securities, commodities or what they are, for regulatory purposes.
The SEC didn’t have a clear position when the litigation began over what defines a digital asset as a security, so the case is based on statements made by William Hinman, the director of the SEC’s corporate finance division, on what is and isn’t a security. For example, Ripple’s argument is that Hinman made a statement in 2018 saying that Ether, the second most valuable cryptocurrency, was a token, not a security, and the market understood that speech as a public notice that digital coins would avoid classification as security. .
The litigation has an additional layer of conflict of interest, which if proven would benefit Ripple in the case. According to Ripple, Hinman had an interest in promoting ether given his prior (and subsequent) involvement with a law firm advising the Enterprise Ethereum Alliance. His speech stating that ether is a token, not a security, and does not do the same for similar digital assets, could be seen as evidence of this conflict. The SEC argued that Hinman’s speech reflected his personal views, not those of the SEC.
But District Judge Analisa Torres was unconvinced by that argument, saying, “the SEC’s assertion that the speech was intended to communicate [the SEC Division of Corporation Finance’s] The approach to regulating digital asset offerings is inconsistent with the SEC’s and Hinman’s previous position that the speech was aimed at and reflected his personal views.
Now, the SEC will have to release all emails and draft versions of the 2018 speech in the coming weeks.
The outcome of this case is still unclear, and it may not provide a conclusive solution for the classification of cryptocurrencies as tokens, currencies or securities, but it puts additional pressure on the SEC to that it provides clearer guidance through the development of rules than through application at the individual level. case.
See also: SEC Chairman Emphasizes Investor Protection in Crypto Regulation