[HN Gopher] Ripple notches win in SEC case over XRP cryptocurrency
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Ripple notches win in SEC case over XRP cryptocurrency
Author : ideksec
Score : 124 points
Date : 2023-07-13 16:58 UTC (6 hours ago)
(HTM) web link (www.reuters.com)
(TXT) w3m dump (www.reuters.com)
| nonethewiser wrote:
| This is supposed to be pretty huge. Besides coinbase and others
| relisting XRP what changes should we expect to see in the short
| term?
| otoburb wrote:
| >> _[...] what changes should we expect to see in the short
| term?_
|
| The article mentions that since the company definitively sold
| unregistered securities to hedge funds and sophisticated buyers
| (without registering with the SEC), a jury will now/soon need
| to "decide whether or not Garlinghouse or Larson aided in the
| company's violation of the law."
|
| Seems pretty clear cut that the company, and it's executives,
| will have further problems to tackle in the near future.
|
| >> _This is supposed to be pretty huge._
|
| This could become much bigger if the SEC uses this enforcement
| as an example reference case for future actions against other
| token projects that followed a similar playbook over the past
| several years, assuming the case is kicked further up the court
| hierarchy on appeal.
| chrisco255 wrote:
| This part I don't understand, aren't those institutions
| "accredited investors"?
| zaroth wrote:
| There are specific regulations that carve-out ways to sell
| unregistered securities to accredited investors. For
| example, Rule 504 and 506 under "Regulation D", but they
| have limits on the amount raised ($10mm for 504) or limits
| on solicitation, which perhaps Ripple did not adhere to?
| You also have to file a Form D to claim the exemption ahead
| of time, which perhaps they didn't do?
| WinstonSmith84 wrote:
| > This could become much bigger if the SEC uses this
| enforcement as an example reference case for future actions
| against other token projects that followed a similar playbook
| over the past several years
|
| There is no other project, not even a close one, who sold
| tokens worth almost $1b rewarding their execs, while offering
| no value whatsoever.
|
| This is not a win for the SEC, this is the case they truly
| couldn't lose. Yes, they didn't lose everything but that was
| also not possible to begin with
| Psyonic wrote:
| Didn't EOS sell $4B worth?
| https://decrypt.co/80144/4-4-billion-eos-token-raise-
| fueled-...
| WinstonSmith84 wrote:
| Fair enough, forgot about that one... At least for EOS,
| that's a blockchain, and the token has a utility unlike
| XRP. Also in defence to the EOS foundation, which to me
| acts in good faith, it's block.one (the company at the
| origin of EOS) which pocketed the whole $4b
| yieldcrv wrote:
| Many ICOs done in the US followed similar but even more refined
| legal rational
|
| and it doesnt really matter if institutional sales are
| unregistered securities because there are many registration
| exemptions to rely upon for sales to institutional
| WhereIsTheTruth wrote:
| Don't fall for the obvious pump&dump campaign
| scottiebarnes wrote:
| Yeah those U.S District Judges are known for using their
| rulings as pumps; she's clearly only looking for exit
| liquidity.
| [deleted]
| modeless wrote:
| > But Torres ruled Ripple's XRP sales on public cryptocurrency
| exchanges were not offers of securities under the law, because
| purchasers did not have a reasonable expectation of profit tied
| to Ripple's efforts.
|
| > Those sales were "blind bid/ask transactions," she said, where
| the buyers "could not have known if their payments of money went
| to Ripple, or any other seller of XRP."
|
| I bet this gets overturned on appeal. It makes no sense to me.
| Seems like a huge loophole if it stands. Maybe it's explained
| better in the actual ruling, anyone have a link? Of course you
| can count on Reuters to never link to important information.
| DennisP wrote:
| The judge referenced the Howey case, saying that just because
| you have an investment contract involving an orange grove, that
| doesn't mean the orange grove itself is a security. A security
| is a contract, not just anything that people trade around in a
| speculative way.
|
| William Hinman of the SEC said much the same thing in 2018:
| https://www.sec.gov/news/speech/speech-hinman-061418
| yata69420 wrote:
| This is pretty obviously the reasonable take.
|
| > A security is a contract, not just anything that people
| trade around in a speculative way.
|
| The scary thing IMO is that I think if you had enough big
| money trading bottlecaps or baseball cards, you'd quickly
| find them being considered a security.
|
| But words have to mean something. Things can't just be a
| "security" because they make the government feel insecure.
| DennisP wrote:
| Enormous money trades soybeans but they still aren't
| securities.
| otoburb wrote:
| >> _Maybe it 's explained better in the actual ruling, anyone
| have a link?_
|
| The docket[1] has the ruling[2], but there's very little
| additional detail provided beyond the focus on "blind
| transactions" to invalidate one of the Howey prongs[3].
|
| As an aside, thank goodness for Court Listener and the
| RECAP/PACER archive!
|
| [1] https://www.courtlistener.com/docket/19857399/securities-
| and...
|
| [2]
| https://www.courtlistener.com/docket/19857399/874/securities...
|
| [3] https://www.sec.gov/corpfin/framework-investment-contract-
| an...
| chrisco255 wrote:
| Not really, unless XRP is a share of a company (it's not) and
| promises dividends (it doesn't), there's no expectation of
| profit by purchasers of XRP.
|
| Profits from speculation is not the same as profits from
| business activities. People purchase everything from bar codes
| (yes, 11 digit bar codes are a commodity with limited supply),
| to trailers, to collectible video games, to oil and minerals,
| precious metals, art, antiques, etc etc all on speculation that
| they'll be worth more in the future.
| modeless wrote:
| Any speculative profit you hope to make on XRP is entirely
| reliant on the business of Ripple. They control and run and
| improve and promote the network, and without those efforts
| XRP would not have any hope of increasing in value at all.
| It's plain as day that people purchasing XRP rely on the
| efforts of Ripple the company for their expectation of
| profit, regardless of who they purchase the XRP from.
| dcolkitt wrote:
| Any speculative profit you hope to make on buying a limited
| edition Rolex is entirely reliant on the business of Rolex
| continuing to market the brand of Rolex.
|
| But if you don't have a formal contractual relationship
| with Rolex SA, then it's quite simply not an investment
| contract.
| jakelazaroff wrote:
| _> Any speculative profit you hope to make on buying a
| limited edition Rolex is entirely reliant on the business
| of Rolex continuing to market the brand of Rolex._
|
| That is not at all true. Rolexes will continue to accrue
| value even (especially?) if the company goes out of
| business.
| scg wrote:
| To the extent that the Rolex brand has a certain inertia
| that will propel it further even after the company ceases
| to exist, that inertia can be attributed to company's
| previous marketing efforts.
|
| Indeed, the brand may retain value for some time even if
| the company goes out of business, perhaps even for a very
| long time. Nevertheless, that doesn't negate the fact
| that ongoing marketing efforts can amplify the brand's
| value and momentum, and the brand's inertia will be even
| stronger should the company cease to exist.
|
| Another way to look at this is to put yourself in the
| shoes of a prospective buyer in _1923_. Wouldn 't you say
| in that situation you rely on the company's continuing
| marketing efforts to further the value of the brand? At
| what point in the last 100 years do you stop relying on
| the company's efforts?
|
| Also, Rolex can easily destroy brand value with ill-
| considered promotional campaigns, so you rely on the
| company to not mess it up.
| unyttigfjelltol wrote:
| A Rolex is a tangible art object that also performs a
| useful function. If, on the other hand, the issuing
| company sold NFTs with no tangible, functional, or
| aesthetic component and somehow sold people on the idea
| Rolex the company was going to pump these otherwise
| useless bits and bytes to the moon, then you're actually
| talking about something analogous to crypto.
| dcolkitt wrote:
| There's literally nothing in existing law that identifies
| tangibility as a specific criteria for what constitutes a
| security and what constitutes a commodity. In fact both
| the CFTC and SEC are specifically on record as saying
| Bitcoin constitutes a commodity. And obviously Bitcoin is
| as intangible as it gets.
| [deleted]
| mrguyorama wrote:
| The thought experiment IMO should be simple: How valuable
| is an XRP token without Ripple as a company?
| rahimnathwani wrote:
| IANAL
|
| The court ruled that:
|
| - Ripple's sales of XRP to institutional buyers _were_ investment
| contracts, but
|
| - programmatic sales via an anonymous exchange _were not_.
|
| The ruling emphasises the distinction between an asset and an
| investment contract. An orange grove isn't an investment
| contract. The sale of an orange grove may or may not be an
| investment contract. Determining whether or not is governed by
| the Howie test.
|
| If ChatGPT is to be believed (ha!), secondary sales of common
| stocks are not investment contracts:
| https://chat.openai.com/share/d3865e23-9210-4977-bda5-b4ded8...
|
| If you don't want to read the whole ruling, look at pages 13-15
| and 22-24.
| travisjungroth wrote:
| > The sale of an orange grove may or may not be an investment
| contract. Determining whether or not is governed by the Howie
| test.
|
| I liked the era when people vaguely claimed that their coins
| weren't a security because securities need to be registered. It
| had an "I'm not an alcoholic, alcoholics go to meetings" flare
| to it. I tried to get in on the fun with a vaporware
| cryptocurrency, OrangeGroveCoin. It got a disturbing amount of
| investment interest.
| glerk wrote:
| Great day for crypto and for financial freedom in general. Great
| to see the justice system finally rebuking these unelected
| bureaucrats and placing some limits on the power they claim to
| have.
| burnte wrote:
| The unelected bureaucrats are authorized by duly elected
| politicians. They do not coalesce in office from the ether,
| they're put there by elected officials. It's not like there's
| no oversight.
| choppaface wrote:
| Ripple still faces over $700m of unregistered security sales as
| part of the decision.
| wonderwonder wrote:
| That's really not a lot of money for them to lose. This is a
| massive win for them and alt coins in general.
| DANmode wrote:
| That's the value of the alleged financial crime
| transactions crimes they committed...not the value of the
| penalties.
| yieldcrv wrote:
| The SEC would be really dumb to take _this_ to _this_ Supreme
| Court
|
| I wouldn't even appeal to the appellate court if I were them, if
| they want to even exist after the subsequent round
|
| I think we got this in the bag ya'll
| amluto wrote:
| This is IMO rather odd logic. I skimmed the opinion. If identical
| logic were applied to ordinary stock shares, it seems like it's
| saying that shares in a C corp are securities if the C corp sells
| them to institutional investors, but that if the C corp sells the
| same shares by putting limit orders on a stock exchange (NASDAQ,
| for example) and Reddit-reading meme stock buyers buy them, then
| somehow the C corp didn't actually engage in a sale of
| securities.
| detroitcoder wrote:
| I had a similar thought at first but then read the actual
| ruling and it made more sense and it all stems on the 3rd prong
| of the Howie Test. It states there needs to be a "reasonable
| expectation of profits derived from the managerial efforts of
| others" which a share of stock has via dividends, etc.
| regardless how it was acquired.
|
| For XRP, there is no explicit rights to profits via the efforts
| of others via the instrument so you then have to look at the
| agreement made via the contract between the purchaser and the
| issuer.
|
| On page 18 of the ruling it outlines this for Institutional
| Investors:
|
| '''The third prong of Howey examines whether the economic
| reality surrounding Ripple's Institutional Sales led the
| Institutional Buyers to have "a reasonable expectation of
| profits to be derived from the entrepreneurial or managerial
| efforts of others."... Based on the totality of circumstances,
| the Court finds that reasonable investors, situated in the
| position of the Institutional Buyers, would have purchased XRP
| with the expectation that they would derive profits from
| Ripple's efforts. '''
|
| However for "Programmatic Buyers" on exchange the ruling said:
|
| '''Having considered the economic reality of the Programmatic
| Sales, the Court concludes that the undisputed record does not
| establish the third Howey prong. Whereas the Institutional
| Buyers reasonably expected that Ripple would use the capital it
| received from its sales to improve the XRP ecosystem and
| thereby increase the price of XRP, Programmatic Buyers could
| not reasonably expect the same.'''
|
| So because there is both no expectation of profits tied to the
| managerial efforts of others, nor from the contract made by a
| buyer on exchange, the court ruled the 3rd prong does not
| apply. Stocks fail the first part of this.
| raingrove wrote:
| Not at all. The shares in a C-corp are securities because they
| will definitely pass the Howey Test. Also, stocks are
| considered securities by a statute. It is unclear whether XRP
| tokens themselves pass the Howey test. (I believe the Howey
| Test is extremely outdated and needs to be revamped, but that's
| a different topic.)
| dcolkitt wrote:
| The holder of a stock certificate has a formal legal
| contractual relationship with the corporation that issued the
| stock. The holder of a token does not have a contractual
| relationship with the entity that issued the token.
|
| Now there's probably some silliness in the fact that if Alice
| creates a token and sells it to Bob, it's an investment
| contract, but if Alice creates a token sells it to Mark the
| middleman who then sells it to Bob it's not an investment
| contract and therefore not covered by the SEC. But this really
| comes down to how Federalist society wing of judges have
| changed Constitutional law.
|
| Up until about 20 years ago, if Congress passed a law that
| wasn't very well defined or left a loophole open, courts were
| generally willing to consider the original intent of the
| lawmakers and interpret the law relative in a commonsense way
| even if it went against the specific language used by Congress.
| Federalist Society judges would argue that courts should
| generally only apply the law as it's actually written (i.e. an
| investment contract requires an actual legal contract). The
| argument is that Congress is around and still exists and
| perfectly free and able to update the existing laws if they're
| unhappy with the wording or oversight of previous legislation.
|
| This is a fundamental disagreement in Constitutional law.
| Should courts use commonsense interpretation of the meaning of
| the laws or should Congress itself, as the actual elected
| representative, be responsible for updating laws and courts
| just enforce the plain meaning. It's also tinted by the fact
| that Congress today has become hopelessly gridlocked and
| obstructionist, and we're largely incapable of passing sweeping
| legislation. So generally if you're not a fan of big government
| or regulation, you're going to be biased towards one view and
| vice versa.
| yyyk wrote:
| >this really comes down to how Federalist society wing of
| judges
|
| Judge was a former Democratic politician and an Obama
| appointee, in NY. Probably not Federalist.
|
| >Should courts use commonsense interpretation of the meaning
| of the laws
|
| Whose commonsense? commonsense isn't common.
| coolestguy wrote:
| >I skimmed the opinion
|
| Then don't comment on it
| shrimpx wrote:
| The SEC should've left crypto alone. Instead of crypto getting
| destroyed by the SEC, now it looks like the SEC might get
| destroyed by the judicial branch if they choose to go up the
| chain with this case. This SCOTUS is massively unfavorable toward
| the executive making up rules to enforce, or taking liberties
| with interpreting standing law. If it gets there I imagine a 6-3
| Alito opinion gutting the SEC's wiggle room in defining a
| 'security' and enforcement reach.
| constantly wrote:
| And with the deep pockets of the crypto puppet masters and all
| the evidence coming out about the Justice's susceptibility to
| taking as many "gifts" as they can get their hands on, that
| just further solidifies the pre-determined outcome.
| shrimpx wrote:
| The US has a standing doctrine called 'delegation', where the
| executive is allowed to make up rules and enforce them. The
| Federalist Society finds that doctrine to be unconstitutional
| and wants to chip away at it. All 6 conservative justices
| have ties to the Federalist Society, so it really doesn't
| require any lavish gifts in this case.
| zdragnar wrote:
| Even the doctrine of delegation has limits, and most of the
| executive branch isn't elected, so the only real check on
| their power is the judiciary.
|
| Congress (whichever half shares the party with the
| presidency) loves delegation, because it means they aren't
| to blame when people don't like the results- they don't
| even have to take a position by voting!
| nobrains wrote:
| What does this mean for Ycombinator's Stellar?
| wonderwonder wrote:
| probably not good news, Stellar was created to compete with XRP
| DennisP wrote:
| The markets seem to disagree, Stellar is up 53% today.
| rvz wrote:
| Looks like the crypto critics are now confused and have gone
| silent again after the Bitcoin leveraged ETFs getting approved
| and now they got this one wrong again. Just for the ones at the
| back, it is absolutely _NOT_ the SEC that determines what is and
| what isn 't a security and the SEC does NOT get the final say,
| which this summary judgement has already shown.
|
| But of course complain all you want, but there was a reason why
| the SEC did not want the Hinman documents unsealed (whilst
| everyone else was screaming at another hysteria around Coinbase
| in [0]) and the SEC attempted to request those documents to be
| sealed and that was denied as well. [1]
|
| [0] https://news.ycombinator.com/item?id=36302231
|
| [1] https://news.ycombinator.com/item?id=36306757
| eric_cc wrote:
| There is a lot of hate here for crypto but you have seen
| nothing yet. The cognitive dissonance is going to be a sight to
| behold in the next 365 days.
| choppaface wrote:
| This is a decision on a motion for summary judgement, not on the
| merits.
| fallingknife wrote:
| I think that's even worse for the SEC? Isn't a summary judgment
| basically the judge saying their case isn't even strong enough
| to go to trial?
| monero-xmr wrote:
| 2024 will be massive. Shitcoin explosion plus bitcoin halving =
| crypto mayhem.
| Scoundreller wrote:
| That and the carrying cost of things that don't generate income
| has gone up a lot.
| DANmode wrote:
| Could you clarify your meaning here?
|
| Thanks!
| WinstonSmith84 wrote:
| "partial" win!? It's hard to see what would be a "win"
| otherwise... It's going to have also larger implications - the
| SEC somehow manages to lose that one, it was hard to imagine or
| predict. If not even XRP is a security, there is truly no other
| coins which could be a security. Hate it or love it, but the SEC
| is simply going to lose all their other lawsuits
|
| EDIT: oh funny ... Reuters edited their title and removed
| "partial" :-)
| choppaface wrote:
| > Torres found the company's $728.9 million of XRP sales to
| hedge funds and other sophisticated buyers amounted to
| unregistered sales of securities
|
| It would probably have been a bigger win for Ripple had they
| gotten out of that one.
| JeremyNT wrote:
| > _" partial" win!? It's hard to see what would be a "win"
| otherwise... It's going to have also larger implications - the
| SEC somehow manages to lose that one, it was hard to imagine or
| predict. If not even XRP is a security, there is truly no other
| coins which could be a security._
|
| This is explained in the article. It was good day for this
| crypto scam, but it wasn't _all_ good news for them:
|
| > _The ruling was also a partial victory for the SEC. The judge
| held that Ripple violated federal securities law by selling XRP
| directly to sophisticated investors, and that a trial should be
| held over its executives ' role in those sales._
|
| Also:
|
| > _Hate it or love it, but the SEC is simply going to lose all
| their other lawsuits_
|
| Quite a bold statement there, based on a single ruling...
| linuxftw wrote:
| Only appellate courts and higher set precedent. This is one
| ruling by one judge, means nothing for other cases.
| dcolkitt wrote:
| Should be noted this decision came from an Obama appointee
| judge in a fairly liberal district (SDNY). The Second Circuit
| is half Federalist Society judges, and six out of the nine
| SCOTUS justices have been on a consistent battle to roll back
| the power of the regulatory agencies. Pretty hard to see how
| the case becomes more favorable for the SEC on appeal.
| gjsman-1000 wrote:
| Well, that's just _fantastic_ for the SEC in their newly-
| launched battle against Coinbase. Good luck with that,
| Gensler.
| granzymes wrote:
| Appellate courts set _binding_ precedent, but district courts
| routinely look to eachother for guidance on how to rule on
| questions where there is no circuit /SCOTUS ruling.
|
| Similarly, a judge in one circuit may look to the decision of
| a different circuit court when their own circuit has yet to
| rule on an issue.
| yyyk wrote:
| If this stands it clears Ripple, but not necessarily the
| exchanges (footnote 16 in page 23). If SEC gets that one, that
| would be enough of a win for them - without the offramps, these
| coins wouldn't survive.
| petesergeant wrote:
| > If not even XRP is a security
|
| Forgive me, I know little about crypto, and am bearish on it,
| but:
|
| My understanding is that Ripple was very much meant to be a
| currency/commodity, unambiguously, where most other crypto
| backed by whitepapers were meant to be securities on the basis
| that they were meant to back some hare-brained scheme or have
| some utility beyond simply being a means of transfer. If I'm
| right about that, then surely Ripple has one of the strongest
| arguments for not being a security?
| eric_cc wrote:
| > Forgive me, I know little about crypto, and am bearish on
| it
|
| Forgive me, how can you form a bearish opinion on something
| you know very little about?
| [deleted]
| LikesPwsh wrote:
| It's not possible to sustain a magic money box where
| everyone can put money in and get more out.
|
| Many people get that far in their thinking, realise
| cryptocurrency is a bad investment, and leave it there.
| wonderwonder wrote:
| The S&P 500 would argue otherwise
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