Regulation
Ripple High Court Still Wins Troubled Waters on Whether XRP Is a Security Deserving of Stricter Regulation
Ripple recently won a clear victory in terms of dollars and cents in a securities class action lawsuit, with the judge dismissing most of the case.
But the judge also muddied the waters on a broader issue, departing from a high-profile decision Last year, judges suggested that Ripple’s XRP could be a security, thus deserving of stricter regulation. The conflicting rulings from two judges – one calling XRP a security, the other saying it is not – are a symptom of a larger problem: the lack of legal and regulatory clarity for the industry of cryptography in the United States. Until this clarity is granted, either by Congress or a higher court ruling, there will likely be more confusion for projects like Ripple and beyond.
On June 20, Judge Phyllis Hamilton of the U.S. District Court for the Northern District of California dismissed most of the class-action lawsuits facing Ripple. She allowed only one state lawsuit against the crypto company and its CEO, Brad Garlinghouse, to go to trial.
The remaining claim – that in a 2017 interview Garlinghouse made “misleading statements” in connection with the sale of the XRP token, which the plaintiffs claimed were securities – is worth just $174, from small potatoes for a business. estimated at $11 billion.
This result is objectively a huge victory for Ripple, something celebrated by the companyThe two groups certified in the lawsuit included all investors who purchased XRP over a six-year period and held it or sold it at a loss. By dismissing all class action claims, the California judge overseeing the case protected Ripple from potentially paying huge damages.
But there was a problem: In his ruling, Hamilton suggested that XRP might, in fact, be a security — breaking with the opinion of District Judge Analisa Torres of the Southern District of New York, who ruled last year in a separate case brought by the U.S. Securities and Exchange Commission that XRP was merely a security when sold to institutional investors.
Torres’ decision was widely hailed as a step toward regulatory clarity for the crypto industry, as well as a potential precedent for other crypto securities cases. Hamilton’s decision doesn’t overturn Torres’ decision — as Ripple executives have pointed out — but she is the second district judge to more or less disagree with Torres’ assessment of XRP.
By disagreeing with Torres, Hamilton has potentially provided ammunition in the form of another alternative precedent for those who believe XRP — and other cryptocurrencies — are securities, crypto lawyers say.
If this all sounds confusing, that’s because it is – even to crypto lawyers.
Hamilton’s decision to dismiss the class action lawsuits was based on statute of limitations grounds and had nothing to do with whether or not Hamilton believed XRP could be a security.
“The court found that some of these claims were time-barred and others did not raise a justifiable issue,” Joseph Castelluccio, a partner at global law firm Mayer Brown and co-leader of the firm’s fintech and blockchain practice groups, said in an email. “In other words, the decisions in favor of Ripple were not based on the idea that XRP is not a security, which has been the central argument made by Ripple and two of its executives in the ongoing cases.”
For the only claim it allowed to proceed to trial, Hamilton applied the Howey test – a pillar of US regulation based on a Supreme Court decision, used to determine whether an asset is a security or not – to XRP and found that it failed on the third prong, writing: “The [court] “I cannot conclude, as a matter of law, that Ripple’s conduct would not have led a reasonable investor to have an expectation of profit from the efforts of others.”
This means, according to crypto lawyers, that we still don’t know for sure whether XRP is a security or not.
“In short, the door is not closed on whether XRP can have security status, at least with respect to this ancillary cause of action,” explained Moish Peltz, a partner at New York law firm Falcon, Rappaport and Berkman.
Ripple executives said Hamilton’s decision does not overturn Torres’ 2023 ruling that XRP is not a security under federal law.
“In the SEC case, Judge Torres ruled that, under federal law, XRP is not per se a security,” Ripple’s chief legal officer Stu Alderoty said in an emailed statement. “That decision remains unchanged and can no longer be challenged in Judge Hamilton’s court.”
It is true that Hamilton’s decision does not in itself call into question Torres’ decision – although the SEC is likely to appeal its decision against Ripple and could potentially use Hamilton’s decision as an alternative precedent. Hamilton is also not the first judge to break with Torres. Another SDNY judge, Jed Rakoff, explicitly dissented from Torres’ ruling in a separate case, SEC vs. Terraform Labs.
But, perhaps more importantly, the divergent decisions emphasize that district courts are not obligated to agree with each other. Although they are free to draw on the decisions of other courts, they are not obligated to do so until a decision is made by a higher court, such as an appeals court or the Supreme Court.
Attorneys interviewed for this article agreed that the district court was divided on whether or not XRP could be a security when sold on an exchange, which was a symptom of a much larger problem: the general lack of legal and regulatory clarity on whether a given crypto asset constitutes a security. .
“It’s actually very difficult to say what the law is in this area,” said Jason Gottlieb, a partner at New York law firm Morrison Cohen and chair of the firm’s digital assets practice.
“In [Ripple’s] “In this case, when we look at the different district court opinions, they not only come to different results, but they come to different ways of getting to those results,” Gottlieb added. “I think there’s a lot of uncertainty when you try to take these district court cases and pit them against each other.”
Gottlieb added that since judges come to different conclusions, it is clear that the law is not well developed when it comes to cryptocurrencies.
“Many district courts will reach different conclusions, and even if they reach the same conclusions, they might arrive there for different reasons,” he said. “Until all of these cases have gone to the courts of appeal and ultimately to the Supreme Court, it is unlikely that we will have much clarity on the law in this area.”
But while district court decisions aren’t necessarily binding, they can serve as useful precedent in an industry like crypto, where the law is still being developed.
After Hamilton issued his ruling, SEC attorneys entered the decision into the docket as a supplemental authority notice – a way for attorneys to call attention to relevant legal issues in other cases – in their case against Binance, the world’s largest cryptocurrency exchange, in Washington, DC
Longo did not place much stock in the SEC’s decision to file Hamilton’s ruling in the Binance case, but said it has become a common practice in the crypto industry that parties in litigation issues supplemental authority notices when there is a potentially relevant decision. In another case.
“It’s part of the reality that a lot of the law here was essentially forged in the context of our trial courts,” Longo said. “This is where the case law came into play. There have been no new regulations or new laws. …I think it’s a symptom of the way the law has evolved here that often any trial court decision on the question of Howey in the context of a cryptocurrency case is frequently cited by other courts which have decisions on these kinds of questions before them. »
Without regulatory clarity from Congress, the crypto industry has no choice but to seek answers in the legal system — a process that Longo and other lawyers say is costly and time-consuming .
“The courts are trying to solve the problems of ‘neuromancers’ at a ‘dark’ pace,” Gottlieb joked.
“The case concerns a [initial coin offering, or ICO] “This happened in 2014. Ten years later, we are still handling some of these cases,” Gottlieb added. “We have issues going on today that we will still have to deal with in five or 10 years in the district courts – and that’s not counting the results of the appeals courts or the Supreme Court. »
The lawyers agreed that the chances of the Ripple case in California actually going to trial are slim to none, because the damages the plaintiff can recover are very small.
“Very often these cases don’t make it to court,” Gottlieb said, adding that in cases where the damages are small, both parties are incentivized to settle the issue amicably.
“Neither side is going to want to go to court and spend a million dollars in attorney fees beyond a few hundred dollars,” Gottlieb said. “If there is an offer of compromise or an offer to settle, that increases the pressure on the plaintiff to settle. … It’s difficult to see this matter going any further.”
The plaintiff’s attorneys did not respond to CoinDesk’s request for comment.