On August 8, Judge Analisa Torres of the U.S. Southern District of New York issued her judgment on the case brought by the Securities and Exchange Commission against the blockchain payments company Ripple.
In her 16-page order, Torres brought the District Court’s gavel down on the SEC’s spectacular failure to expand the administrative state beyond what the law allows. The SEC should read the room and move on.
From the moment the SEC filed its case against Ripple in December 2020, the breadth and audacity of its legal assault on the company and its two senior executives rightly dubbed it the cryptocurrency trial of the century. The SEC argued that the XRP token, a digital commodity by any definition, was a security and that all XRP sales between any two parties are investment contracts with Ripple in perpetuity.
The lawsuit not only implicated the company and its executives for their XRP sales on public exchanges but also tens of thousands of retail holders, users and traders of XRP, even if they’d never heard of Ripple and cared nothing about its fortunes.
As a way of defaming all blockchain technology as worthless, the SEC claimed that the purpose of a decentralized ledger like XRP and its native asset was to benefit one company and its nefarious executives. This is how regulators practice “regulation by enforcement” by getting judges to give them authority that the law doesn’t provide.
In retrospect, it was an easy argument for Ripple’s legal defense to dismantle. Even in the first case hearing in March 2021, Magistrate Judge Sarah Netburn told the SEC she understood that XRP “has a utility.” Torres’ opinion on the merits of the lawsuit last year concluded that “XRP, as a digital token, is not in and of itself a ‘contract, transaction or scheme’” under securities laws. With that, the central argument for the SEC’s power play to gain control over all cryptocurrencies failed.
After analyzing sales by Ripple and its executives, Torres concluded that only a narrow set of XRP sales to institutional investors, in which actual investment contracts existed, were unregistered securities that violated Section 5 of the Securities Act. In the end, it is a registration omission and not some grand criminal enterprise deserving of the hundreds of millions of dollars spent on this case.
Torres’ judgment once again schooled the SEC on the scope and limits of the laws that govern the agency. She reminded the SEC that there had never been any allegation of fraud in the case and rejected the SEC’s demand for disgorgement as there were no victims. In place of the SEC’s $2 billion demand, she ordered Ripple to pay a civil penalty of $125 million, which the company promptly said it would pay in cash from its balance sheet.
Indeed, Ripple’s business is growing outside the United States since the SEC forced a regulatory cloud over its ability to operate in the country. Regulators in Japan, Singapore and the United Kingdom have already declared XRP is not a security and have welcomed Ripple to offer cross-border payment solutions to banks in their markets. However, XRP retail holders worldwide felt the sharp end of the SEC’s stick when the lawsuit was filed in 2020.
The SEC’s sweeping legal theory against XRP in the opening shots of the lawsuit crashed the token’s value and then locked the wallets of retail holders when public exchanges suspended trading for fear of SEC retaliation. The estimated losses were $15 billion for tens of thousands of retail investors the SEC is supposed to be protecting, despite having been warned about this by former SEC Commissioner Joseph Grundfest just before the lawsuit was filed.
In the end, the whole Ripple case was emblematic of the SEC’s bumbling failure to produce any results worth having. Agency chair Gary Gensler doubled down on turning the case against Ripple, which he’d inherited, into a war on an entire industry he was determined to win. Instead, it has tarnished the administration, isolated Gensler within his own party from its rising generation of new leaders and turned him into a political liability in an election year.
Gensler — and anyone left at the SEC who cares about the agency’s reputation — would be wise to spin Torres’ final judgment into a victory, take the civil penalty and move on. Dragging out the war on crypto any longer, particularly after the Supreme Court has made its intentions clear on setting limits for the administrative state, will be a waste of taxpayer dollars and political capital when there isn’t much of either left to spend.
