A federal court has weighed in on whether a prominent cryptocurrency can be regulated by the U.S. Securities and Exchange Commission (SEC) as a security – a fungible, negotiable financial instrument representing a financial value like a stock, bond, or option. A judge in the U.S. District Court for the Southern District of New York ruled on July 13 that the sale of Ripple Lab’s XRP tokens on exchanges and through algorithms were not investment contracts, but the institutional sale of tokens were and, therefore, violated federal securities laws.
CEI financial policy expert John Berlau praised the ruling for putting some limits on SEC overreach:
“XRP was the third largest cryptocurrency when the SEC declared it to be an illegal ‘unregistered security’ without any new rulemaking or change in law. This action was destructive to thousands of Americans who had XRP in their portfolios and to innovators facing uncertainty about red tape from the SEC for the beneficial cryptocurrencies and blockchains they were developing.
“The decision by Judge Analisa Torres, an appointee of President Barack Obama, to void much of the SEC’s complaint puts some needed legal limits on the SEC’s ability to deem cryptocurrencies as securities. Judge Torres notes, as I have in my writings, that the SEC can’t deem an object as a security merely because some people purchase it for investment purposes. Otherwise, as she notes, the SEC could declare cars and horses as securities.
“Judge Torres unfortunately gets it wrong in affirming the SEC’s charges against Ripple for its direct sales of XRP to institutional investors. If a cryptocurrency – like a horse or a car – cannot be deemed a ‘security’, the SEC should have no jurisdiction until Congress says otherwise.
“But overall, the greenlighting of XRP trading on crypto exchanges and platforms, which is already resulting in venues such as Coinbase relisting XRP, will have great benefits for American consumers, investors, and entrepreneurs.”