The U.S. Securities and Exchange Commission (SEC) and Ripple Labs are clashing anew over Ripple’s defense that the SEC failed to provide “fair notice” that XRP transactions violated the law or that the SEC would later claim XRP to be a security.
Earlier this week, Ripple asked the court to take into consideration a July 14 statement by SEC Commissioners Hester Peirce and Elad Roisman as support for Ripple’s opposition to the SEC’s motion to strike its fair notice defense. The commissioners’ statement referenced the SEC’s recent enforcement action and settlement with Blotics, a UK-based company that operated Coinschedule.com, a once-popular crypto website that publicized initial coin offerings.
“This statement by two sitting SEC Commissioners makes even more clear that during the time relevant to this case, members of the public did not have fair notice of what the law requires,” wrote Ripple’s defense attorney Michael Kellogg, in a letter to U.S. District Judge Analisa Torres.
“Commissioners Peirce and Roisman have candidly explained that there is a ‘decided lack of clarity for market participants around the application of the securities laws to digital assets and their trading’ and that the application of the Howey test to such assets ‘is not crystal clear’; that the staff’s guidance to date contains a ‘large number of factors and absence of weighting [that] cut against . . . clarity,’ Kellogg wrote. “The only certainty [they] see is that people have questions about how to comply with the applicable laws and regulations.”
See related article: Are SEC commissioners bolstering Ripple’s defense in XRP lawsuit?
In response, the SEC says that its own commissioners’ views do not reflect the position of the agency and that what they say in public is not relevant to the SEC’s claims that Ripple, its CEO Brad Garlinghouse and chairman Chris Larsen violated the law.
“The Statement at issue is not a statement of the SEC itself or any sort of binding authority on this Court,” wrote SEC attorney Mark Sylvester in a letter to Judge Torres.
“The Statement cannot serve as the basis to hold that the Constitution bars the application of the securities laws’ registration requirements to Ripple’s conduct,” Sylvester wrote. “Nor can the Statement serve as the basis to dismiss the SEC’s claims that the Individual Defendants, with their own offers and sales and other conduct, aided and abetted Ripple’s unregistered offers and sales.”
“While Defendants would have the Court look to speeches, the only relevant SEC action is that which the SEC took, upon consideration of all five Commissioners, to authorize the filing of this enforcement action to hold Defendants accountable for unregistered offers and sales of their digital assets to public investors.”
Securities lawyers Adriaen Morse Jr. and Cory Kirchert from Arnall Golden Gregory LLP told Forkast.News in an email that “the filing by Ripple and the reply by the SEC amount to a lot of huffing and puffing but are very unlikely to weigh heavily in the Court’s consideration of the motion to strike.”
“The SEC is correct when it points out that statements by individual Commissioners (or a couple of Commissioners), issued in a press release or otherwise made public, do not constitute the position of the SEC acting as a Commission — in other words, such statements carry no legal weight and are simply the individual opinions of the Commissioners who make them,” they added. “It is hard to argue that the later statement by a couple of the Commissioners is an argument in favor of the defense to the lawsuit that Ripple is advancing, i.e., lack of ‘fair notice.’”
At the heart of the SEC’s lawsuit against Ripple is whether transactions involving XRP constitute “investment contracts” and therefore securities subject to registration under Section 5 of the Securities Act of 1933. Ripple has argued that the SEC did not provide the company and market with fair notice that XRP transactions violated the law, but the SEC says the government had no duty to warn Ripple that XRP was a security. As part of its efforts to bolster its fair notice defense, Ripple has sought the SEC’s internal documents discussing Bitcoin, Ethereum and XRP and has called William Hinman, the former head of the SEC’s Division of Corporation Finance to testify.
The problem with the SEC’s actions, according to Morse and Kirchert, “isn’t primarily about a lack of fair notice, although with respect to XRP, it certainly looks like after-the-fact law-making considering that XRP was a viable and very widely used cryptocurrency long before the SEC ‘discovered’ in 2017 that these types of digital tokens were actually securities.”
“The primary problem with the SEC’s regulation of these tokens, by and large, is that the tokens do not satisfy the Howey test and are not investment contracts,” Morse and Kirchert said.
See related article: SEC seeks to knock out Ripple defense, says no duty to warn over XRP
With the rapid rise of cryptocurrencies including stablecoins as well as decentralized finance, the SEC has been in the spotlight over the need for regulatory clarity for the industry.
U.S. Senator Elizabeth Warren, who chairs the U.S. Senate Committee on Banking, Housing and Urban Affairs sub-committee on Economic Policy, has called on SEC Chairman Gary Gensler to provide information about the SEC’s authority to regulate cryptocurrency exchanges.
Speaking to the American Bar Association’s Derivatives and Futures Law Committee earlier this week, Gensler said that crypto tokens priced off securities and operating like derivatives would be considered as securities.
“Make no mistake: It doesn’t matter whether it’s a stock token, a stable value token backed by securities, or any other virtual product that provides synthetic exposure to underlying securities,” Gensler said. “These platforms — whether in the decentralized or centralized finance space — are implicated by the securities laws and must work within our securities regime.”
Gensler’s remarks followed earlier comments by U.S. Treasury Secretary Janet Yellen said that the United States needs “to act quickly to ensure there is an appropriate U.S. regulatory framework in place” for stablecoins.
See related article: Stablecoins promise much, but can they deliver?