Crypto Firms Facing US SEC Charges Find Hope in Ripple Ruling, Experts Say

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July 17 (Reuters) – A cryptocurrency developer’s historic legal victory against the U.S. Securities and Exchange Commission (SEC) will galvanize Coinbase (COIN.O) and other companies to resist the government’s bid agency to assert its jurisdiction over the industry, experts said.

Thursday’s ruling that Ripple Labs Inc did not violate securities law by selling its XRP token on exchanges was the first major setback for the SEC in a decade of enforcement against the crypto industry. -cash. Other crypto firms accused of illegally operating digital asset exchanges are exploring ways to capitalize on the ruling, according to two sources familiar with the matter who asked not to be named as they were not authorized to speak publicly.

The crypto industry is in a standoff with the SEC and its Democratic Chairman Gary Gensler, who has described the crypto market as a “Wild West” riddled with fraud. Claiming that 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 firms have long challenged the jurisdiction of the SEC, but until Thursday, no court had upheld that view. Now industry lawyers have ammunition to fight back.

“This case will make people rethink, and I think it already is,” said Robert Frenchman of Mukasey Frenchman LLP.

Both sources, for example, said the companies are considering ways to use the judge’s decision in their defense. “I can’t imagine any of the exchanges will somehow use this,” one said.

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

U.S. District Judge Analisa Torres in New York ruled on Thursday that her sales on public cryptocurrency exchanges were not securities offerings because buyers did not have a reasonable expectation of profit that depended on the efforts of Ripple, a key factor in determining whether XRP was a security at the time. However, it 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 viewed the ruling as a watershed moment and the judge’s reasoning as a new line of defense for Coinbase, Binance, Bittrex and other exchanges targeted by the SEC for trading securities.

“This reinforces Coinbase and Binance’s arguments that digital assets that are traded on these exchanges would not be considered securities,” said Teresa Goody Guilln of Baker & Hostetler in Washington.

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

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

CALL FROM THE SEC?

As the cryptoverse celebrated, some legal experts said they believe the SEC will challenge the 2nd US Court of Appeals ruling to stop judges hearing other cases from deciding other assets. cryptos sold on an exchange are not securities.

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

Ripple’s Chief Legal Officer, Stuart Alderoty, said in an interview with Reuters that the company “wouldn’t hesitate to appeal, as the judge was right on her key findings,” adding, “I think any appellate court reviewing that would amplify and endorse those decisions, which would certainly be welcome,” he said.

Experts agreed that a call carries 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 “toasted,” said Philip Moustakis, lawyer at Seward & Kissel.

“It presents a substantial risk that their jurisdiction over the crypto markets will be restricted 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 Trust Principles.

Jody Godoy reports on banking and securities law. Contact her at [email protected]

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

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