On Friday, the Blockchain Association filed an amicus curiae brief in the SEC v. Ripple. The Association’s lawyers joined other friends of court petitioners like John Deaton in arguing that “intermediate buyers” of cryptocurrency coins and tokens are not necessarily investing in securities. or involved in an investment contract.
…even if the initial issuance of a token qualified as an investment contract…the SEC appears to believe that token remains a “security” through subsequent subsequent transactions, no matter what rights the initial purchaser retained for itself same… why? the downstream user buys that token… or how that token is used.
AMICUS CURIAE BRIEF THE BLOCKCHAIN ASSOCIATION, theblockchainssociation.org, 10/28/22
Interestingly, these petitioners are not arguing against the SEC’s allegations that Ripple initially sold XRP (USD-XRP) as an unregistered value. Rather, they argue that there is an obvious limit to the application of current securities regulations to digital assets and a limit to using the hello Test in coins and tokens because, by their nature, they do not fit easily into the now outdated regulatory regime instituted in 1946.
The Blockchain Association explained the specific problem in a simple but unorthodox way in the following summary excerpt:
… SEC Chairman Gary Gensler has recently stated that the “vast majority” of tokens are, not werebut are – values.
AMICUS CURIAE BRIEF [emphasis is original] (link above)
The report made a series of points that make this contrast between “were” and “are”. And the article below discusses some of the ideas included and how the Court’s decision can support XRP and the broader crypto sector through regulatory clarity. A finding that XRP is not currently a security would likely have broad positive ramifications on the current crypto legislation process, general institutional adoption, and the pricing of similarly situated large-cap altcoins.
Tokens work beyond being investment contracts
Many holders seek to profit from the appreciation of their currencies and rely on the efforts of those who issue the currency to increase these profits. But now there is substantial, significant and fast-growing evidence that cryptocurrencies work far beyond a simple means of speculation. Examples of some uses are compiled below and appear as cited in the Blockchain Association amicus brief.
- Some people use tokens as a currency or payment method.
- Some tokens are used in a particular implementation on a blockchain-based infrastructure.
- Some tokens allow users to participate in community governance…
- Other tokens allow users to collectively own some asset such as a domain name.
- Some tokens represent digital realizations of art, music, video, or other media, and may convey intellectual property rights…
In fact and in practice, continuing to treat digital assets as securities each time they are transferred would affect their ability to function in the ways listed above. Due to this fact, the summary of the Blockchain Association suggested the following:
The Association respectfully submits that even if this Court holds that the original issue of XRP was a security, the Court should refrain from ruling that secondary sales are investment contracts, or that XRP itself is, today, a security.
AMICUS CURIAE BRIEF (link above)
hello test problems
In the case of SEC vs. Howeythe Supreme Court established that “an investment contract, for the purposes of the Securities Act, means a contract, transaction or plan whereby a person invests his money in a common enterprise and is induced to expect profit solely from the efforts of the promoter or a third party.”
However, beyond the first blush, this hello the proof becomes somewhat problematic when applied to cryptos:
1. With crypto projects, there is often no investment of money to receive starting tokens. For example, projects attract participants to their platform through token giveaways for using the system or tokens are partially distributed for free or for charity.
The Supreme Court’s language in Howey must be taken literally: an investment contract requires an actual investment of tangible consideration. Intangibles cannot be enough, because such concepts could include literally anything.
AMICUS CURIAE BRIEF (link above)
2. As discussed in the first section, many token holders do not expect profit and use or consume more and more of their coins or tokens. And the brief quotes and comments on United Housing Foundation v. Forman from 1975:
In contrast, when a buyer is motivated by a desire to use or consume the purchased item… the securities laws do not apply… [Forman]
Accordingly, even if the Tribunal finds that some participants bought XRP with the expectation of profit, the Association respectfully requests that the Tribunal be careful not to conclude that, of necessity, all buyers in the XRP market had some expectation of profit. .
AMICUS CURIAE BRIEF (link above)
looking at the hello proof, many of the previous arguments by cryptocurrency advocates had focused on the decentralized nature of cryptocurrency platforms and their development. These arguments correctly pointed to the “promoter” or “third party” that is required in the test, often more difficult to identify. And the above arguments add to these problems for the SEC’s position, especially by weakening the expectation of test gains relative to downstream buyers of the assets.
Fair Notice Defense
Due process includes fair notice that an act is criminal prior to the crime. And the SEC has persuasively argued that an “ordinary intelligence” crypto industry participant is aware that the sale of digital assets to raise capital involves federal security laws. The Commission has pointed to the former hello test alongside enforcement actions and public statements to provide the necessary guidance and notice. It is important to note that there is security if there is an investment of money, in a common company, where profits are expected, from the efforts of the promoter of the company.
However, as detailed by the Blockchain Association, beyond the apparently simple hello proof, in the application of the SEC regulations are less clear. And some SEC commissioners have agreed that confusion remains. The link just below the SEC statement on Coinschedule is a short must-read on this topic for those following the process of regulating cryptocurrencies.
There is a distinct lack of clarity for market participants around the application of securities laws to digital assets and their trading, as evidenced by the requests for clarity each of us receive and constant contact with staff at Commission for non-action and other relief.
In the matter of Coinschedule, sec.gov, 7/14/21
SEC commissioners have also weighed in on the “were” versus “are” debate, though not in a dispositive and fair manner. The following quote about Ethereum (ETH-USD) is from Hinman’s now famous speech (note the amusing title).
And putting aside the fundraising that accompanied the creation of Ether, based on my understanding of the current state of Ether, the Ethereum network, and its decentralized structure, the current offerings and sales of Ether are not securities transactions.
Digital Asset Transactions: When Howey Met Gary (Plastic)sec.gov, 6/14/2018
Furthermore, the Blockchain Association argues that the SEC cannot simply ask platforms to simply register as securities. This is because the “security” moniker opens up a Pandora’s box related to “buying, selling, brokering, trading, custody, trading and exchanging” where existing regulations are not geared towards how crypto industry participants actually use your coins and tokens. In the quote below, the Blockchain Association argues that fair notice requires regulations that are “sensitive in the context of a software token.”
This Court must set a marker: Before the SEC initiates enforcement actions against blockchain industry participants for failing to comply with securities laws and regulations, those laws and regulations must be clear, understandable, and sensible in the context of a software token that has a fundamentally different technological nature than a traditional security.
AMICUS CURIAE BRIEF (link above)
Decisive moment for XRP and Crypto Sector
A Forbes article titled “Crypto Law Experts Suggest SEC Likely to Lose Key Case, Discredit Howey Test” demonstrates that lawyers outside the crypto industry tend to agree with the points raised in the Association’s amicus curiae brief. blockchain. And if accepted by the Court, the above arguments provide a regulatory cut of the definition of values for XRP, similarly situated coins and tokens and the digital asset markets that trade them.
One result could be that Ripple, which has directly declared its willingness to settle, pays a relatively high fine; but Ripple would require an agreement or decision that XRP is not a security. This result would likely allow XRP to re-list on digital asset markets like Coinbase (CURRENCY). For this reason, a constructive lawsuit resolution may not be a sell-the-news event, as new channels of demand could come online soon after the resolution.
So now a main question is timing. Supposedly final summaries are due at the end of the year. However, it appears that the SEC may again adopt delaying tactics and has indicated the need for more time and more “pages” to respond to the friend-of-the-court reports being offered. Note that this week Coinbase also officially proposed an amicus curiae brief that you have prepared and provided to the Court. On the other hand, the outcome of the case has a direct bearing on Coinbase’s business and its broader proposal for a new regulatory regime designed specifically for digital assets.
In any case, the long battle of years is coming to an end. Both parties have filed and responded to briefs requesting summary judgment in their favor. Taking into account the timing opinions of the media and Ripple representatives, the resolution of the lawsuit will probably come in the first quarter of next year. This makes the next few months a prime accumulation period for XRP from a fundamental standpoint. I am giving an initial buy rating on XRP based on litigation potential.
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