Request for review of crypto regulations at SEC after partial outcome of lawsuit against Ripple (XRP)

Recently, Rep. Ritchie Torres (DN.Y.) asked whether the Securities and Exchange Commission (SEC) will “reconsider its regulatory stance” on crypto after a recent legal defeat last week in the case against Ripple (XRP). 

Below are all the details. 

Ripple (XRP): questioning the SEC’s regulation of crypto

As anticipated above, Representative Ritchie Torres is asking whether the Securities and Exchange Commission (SEC) will review its regulatory stance on cryptocurrencies following a recent legal stop.

Indeed, after a federal judge ruled that some digital asset transactions fall outside the SEC’s regulatory scope, the agency suffered a legal defeat, as described by Rep. Torres. 

Hence, he sent a letter to SEC Chairman Gary Gensler in which he expressed his views regarding the ruling. The court decision clarified that cryptographic assets are not considered securities, but can be sold as part of investment contracts, which qualify as securities.

As we know, the case involves XRP, a token issued by Ripple Labs, and the agency had argued that sales of this asset since 2013 constituted an unregistered securities offering. 

However, Judge Analisa Torres ruled that only sales to institutional buyers could be considered securities, excluding sales to retail buyers and employee salaries paid with XRP because they did not constitute investment contracts.

When can transactions be defined as investment contracts?

It is worth recalling that the definition of investment contracts is a crucial aspect in determining whether an instrument falls under the category of securities. 

According to the SEC v. WJ Howey Co. court case, dated 1946 and involving citrus groves in Florida, transactions can in fact be considered investment contracts if they have certain characteristics. 

Among these we see: an investment of money; a joint venture; reasonable expectations of profits; and profits from the efforts of others. 

Either way, this case is of significant importance to the cryptocurrency industry and the regulatory interpretation of the various transactions involving these digital assets.

Torres’ position on cryptocurrencies 

In addition to the above, we also see that Representative Torres expressed his concern about the SEC’s application of the Howey test, arguing that it was too strict. 

Indeed, according to him, the court’s ruling represents a return to a strict interpretation of the test.

Although the district court’s decision is not binding elsewhere and could be appealed, this may indicate that the SEC’s inflexible attitude about whether most digital assets are considered securities and must be registered is open to successful challenge under current regulations.

Hence, Torres’ letter also highlighted the judge’s criticism of the SEC for failing to provide the industry with fair notice regarding which digital assets fall under the category of securities. 

Under Gensler’s chairmanship, the SEC has not issued specific rules on cryptocurrencies and has not provided clear guidance on them. Indeed, we know that the SEC has been a major player in a US government regulatory effort in recent months to rein in the cryptocurrency industry. 

This crackdown effort involves other regulatory bodies, the White House and some members of Congress. Representative Torres, on the other hand, is supporting the cryptocurrency industry with an opposite approach. 

Indeed, last week he called for two investigations into the license granted to Prometheum Ember ATS, which allows it to operate as a cryptocurrency exchange, even though it is not currently active in that business and may not be able to do so under current regulations.