SEC - Page 53

On July 13, 2023, Judge Analisa Torres of the United States District Court made a significant ruling declaring that Ripple’s XRP token should not be classified as a security when traded on retail digital asset exchanges.

This decision came as a major victory for Ripple and the entire cryptocurrency community in the United States.

Stuart Alderoty, Ripple’s chief legal officer, emphasized that the ruling debunks the U.S. Securities and Exchange Commission’s (SEC) theory that a token can be considered an investment contract and, therefore, a security.

He believes this ruling puts an end to the SEC’s dominance in the crypto space and its tendency to settle with smaller players who lack resources to challenge them.

Despite the positive outcome for Ripple, New York Representative Ritchie Torres raised concerns regarding the lack of protection for retail investors in securities law.

Torres advocated for a market structure bill to safeguard average American consumers in the crypto market.

He highlighted the importance of distinguishing between digital assets and securities within investment contracts, and the need to differentiate between institutional and retail buyers.

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According to Torres, if a crypto token is purchased directly from an issuer or promoter by an institutional buyer, it qualifies as a security offering.

However, if the same token is acquired by a retail customer on an exchange, it falls outside the scope of securities law.

This distinction calls for a comprehensive market structure bill that can establish a reliable regulatory framework for digital assets.

The Representative revealed that he has been actively negotiating with Republicans in the House Financial Services Committee to craft a crypto market structure bill that balances robust regulation with protecting retail investors from bad actors.

While he personally supports blockchain technology and its potential to revolutionize various sectors, Torres asserted that policymakers’ role is to create a framework for regulating digital assets and safeguarding investors and consumers, irrespective of their personal views on the utility of cryptocurrencies.

Torres underlined the urgency of passing a market structure bill alongside the Ripple decision to provide clarity and protect retail customers.

He aimed to shield crypto innovators from arbitrary enforcement and, more importantly, ensure the safety of individual investors.

The combination of the Ripple ruling and a market structure bill would create a much-needed regulatory structure for the rapidly evolving crypto industry.

Clarity in regulations is deemed essential to enable the growth and success of blockchain technology and cryptocurrencies in building a more efficient and secure payment system, known as Web3.

Torres’ advocacy focused on the importance of addressing the shortcomings of the current status quo to provide a safer environment for retail customers investing in digital assets.

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During his speech at the Ethereum Community Conference (EthCC), Mudit Gupta, the chief information security officer of Polygon, shed light on the practical challenges associated with private or mnemonic keys despite their security advantages.

Gupta emphasized the disparity between theoretical and practical security within the blockchain and crypto space.

While the industry is rapidly progressing in terms of theoretical security, Gupta believes it lags significantly behind in practical security.

He specifically highlighted the difficulties of safeguarding private keys compared to passwords. Private keys, once leaked, cannot be changed, unlike passwords.

Gupta explained that the responsibility of keeping a mnemonic or private key safe poses a far more challenging problem.

The consequences of failing to secure mnemonic keys are significant, with billions of dollars already lost due to individuals misplacing or losing their keys.

Gupta stressed the urgency of addressing this issue, as countless users’ wallets contain billions of dollars that are improperly secured.

Gupta acknowledged that private keys are theoretically 100% secure, as long as they remain unknown to others.

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However, he recognized practical challenges that can arise, such as ensuring access to funds for loved ones in the event of the owner’s death or dealing with compromised keys.

Furthermore, Gupta discussed the inherent difficulties faced by defenders in the security realm. He pointed out that attackers have an easier time than defenders since they only need to exploit a single vulnerability.

Defenders, on the other hand, must cover every possible entry point, leaving no room for any oversight.

Despite these challenges, Gupta emphasized the importance of defending against cyber threats.

He acknowledged that security professionals have a tougher role compared to hackers and exploiters, as defenders must diligently cover all bases to ensure the integrity of systems.

In conclusion, Mudit Gupta highlighted the practical challenges surrounding private or mnemonic keys, even though they offer enhanced security.

He called for greater attention to securing mnemonic keys, considering the billions of dollars at risk due to improper security measures.

Additionally, Gupta emphasized the arduous task faced by defenders, who must safeguard every aspect of a system against attackers seeking vulnerabilities.

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New York Representative Ritchie Torres has urged Gary Gensler, Chair of the United States Securities and Exchange Commission (SEC), to reconsider the regulator’s stance on cryptocurrencies following a recent court ruling.

In a letter dated July 18, Torres requested that the SEC focus its enforcement efforts on “bonafide bad actors” instead of treating the majority of crypto assets as securities without discrimination.

The lawmaker’s appeal comes in light of a court ruling in the SEC’s case against Ripple, which indicated that the XRP token is largely not a security.

Torres criticized the lack of clarity and guidance provided by the SEC under Chair Gensler’s leadership.

He pointed out that the commission has not issued any rules on crypto assets and has been inconsistent in its messages, often contradicting both the Commodities Futures Trading Commission (CFTC) and itself.

Torres echoed the sentiments of other experts who believe that a swift appeal against the court decision is unlikely.

This ruling could also jeopardize the SEC’s case against Coinbase, which the commission filed in June for allegedly offering unregistered securities.

The lawmaker emphasized the need for the SEC to reconsider its regulatory approach to the crypto industry, describing it as a “reckless regulatory assault.”

He called for a reassessment of the commission’s actions, highlighting the urgency of establishing clear regulations for the sector.

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It is worth noting that Representative Torres coincidentally shares a surname with the judge presiding over the SEC v. Ripple case, Judge Analisa Torres.

He referred to the court ruling as the “Torres Doctrine,” likely in reference to the judge rather than himself, as he expressed confidence in the judge’s decision-making. Representative Torres is a member of the Congressional Blockchain Caucus.

The response from the SEC to the court ruling remains uncertain. Chair Gensler expressed disappointment on July 17 regarding the potential impact on retail investors, and the commission is still deliberating on the actions it may take in response.

The development raises questions about the future regulatory landscape for cryptocurrencies in the United States and the SEC’s approach under Chair Gensler’s leadership.

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The CEO of Haun Ventures, Katie Haun, a former federal prosecutor turned chief executive of a crypto-focused venture capital fund, expressed her surprise at the possibility of an immediate appeal from the United States Securities and Exchange Commission (SEC) regarding the Ripple case ruling.

Haun believes that the SEC benefits from the lack of legal clarity in the current situation.

On July 13, Judge Analisa Torres granted a partial summary judgment in favor of Ripple Labs, determining that XRP is not a security.

While some commentators speculated that the SEC might appeal the decision, Haun took to Twitter on July 15 to explain her skepticism about an immediate appeal.

She stated that the SEC likely wants to maintain the current confusion as it works in their favor, and losing on appeal could put their future enforcement actions at risk.

Haun’s perspective is supported by Ripple Labs CEO Brad Garlinghouse, who also believes that it will take several years before the SEC decides to lodge an appeal.

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Garlinghouse further suggested that an appeal from the SEC would only reinforce Judge Torres’ decision that XRP is not a security.

Jeremy Hogan, a U.S. lawyer and Ripple commentator, shared his belief that the SEC might launch an appeal after the scheduled trial between the SEC and Ripple concludes in early 2024.

The SEC is currently involved in lawsuits against prominent crypto exchanges Binance and Coinbase for alleged securities law violations.

The recent ruling in the Ripple case, while not a binding precedent, could potentially influence the outcomes of these cases.

In response to the ruling and the resulting confusion, many crypto commentators and lawmakers are urging Congress to provide legal clarity for the cryptocurrency industry.

Brian Quintenz, the former commissioner of the Commodity Futures Trading Commission and head of policy for crypto venture capital fund a16z, argued that the Ripple court ruling only adds to the existing uncertainty faced by entrepreneurs and builders in the crypto space.

U.S. Senator Cynthia Lummis emphasized the urgent need for Congress to establish a clear and comprehensive regulatory framework for the cryptocurrency industry, highlighting the significance of the recent ruling.

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In a LinkedIn analysis, former Securities and Exchange Commission (SEC) official John Reed Stark criticized the recent ruling on Ripple Lab’s case, describing it as “troublesome on multiple fronts.”

Stark dissected Judge Analisa Torres’ decision from July 13, which favored Ripple in a lawsuit brought by the SEC in 2020. The SEC alleged that Ripple’s XRP token, valued at $0.74, was a security.

Judge Torres concluded that the XRP token was a security when sold to institutional investors but not in “programmatic sales” and other types of sales, such as token distribution to employees.

Ripple also faces penalties and potential rescission for institutional investors, involving sales of approximately $720 million.

According to the ruling, institutional investors had a reasonable expectation that Ripple would utilize the capital from sales to enhance the XRP ecosystem and increase the token’s price.

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In contrast, investors purchasing XRP tokens through exchanges could not reasonably expect the same outcome.

Stark raised concerns about the decision, claiming it established a discriminatory “class of quasi-securities” based on the investor’s sophistication.

He expressed disbelief that the same token could be considered a security in some instances but not in others, and that retail investors with less knowledge would receive less protection.

Stark highlighted the contradiction between the decision and investor protection principles, arguing that investors’ level of protection should not depend on their familiarity with the materials related to the asset purchase.

He noted that securities laws were designed to safeguard individual investors who may not have the ability to fend for themselves, but the Ripple decision appeared to contradict this principle.

Given his extensive experience as an attorney in the SEC’s Enforcement Division, Stark believed the decision was on shaky ground and likely to be appealed and overturned.

He predicted that the SEC would appeal to the 2nd Circuit, and the District Court’s rulings on “programmatic” and “other sales” would be overturned.

While Judge Torres’ ruling was viewed as a victory by the crypto community and Ripple, CEO Brad Garlinghouse anticipated a prolonged process before the SEC could appeal.

Garlinghouse also regarded the institutional sale decision as the least significant aspect of the lawsuit, suggesting that an appeal against the retail sale ruling would only strengthen Torres’ decision.

Overall, the Ripple case has sparked controversy and raised important questions about the classification of cryptocurrencies and the extent of investor protection under securities laws.

The final outcome remains uncertain as the legal battle continues.

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Eeon, a third-party entity, has entered the legal battle between the United States Securities and Exchange Commission (SEC) and Binance, a cryptocurrency exchange.

According to court filings submitted to the United States District Court for the District of Columbia, Eeon argues that the SEC and Binance’s attorneys have failed to adequately represent the interests of Binance’s customers, prompting Eeon to step in and seek representation on their behalf.

Eeon asserts that they are the appropriate party to be involved in this case, citing a court order from June 17, 2023, which identified them as “Customers.”

They claim that they are not ordinary customers, but rather stakeholders, investors, and owners of cryptocurrency held by Binance and its subsidiaries.

Eeon firmly believes that their interests were not adequately taken into consideration during the legal proceedings.

The crux of Eeon’s argument is that cryptocurrencies should be classified as commodities rather than securities.

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They argue that cryptocurrencies are primarily used for personal and household purposes rather than commercial transactions.

Eeon also highlights the lack of specific regulations for cryptocurrencies, which limits the SEC’s jurisdiction over these assets.

Furthermore, Eeon alleges that Binance has exerted control over customers’ crypto assets by blocking access and withdrawals without proper notice.

They contend that the SEC’s actions have worsened the situation for investors instead of protecting their interests.

Eeon accuses the SEC of wrongly accusing customers of money laundering.

Consequently, Eeon is seeking a court order to grant customers access to their frozen assets on Binance’s platforms.

Eeon also argues that offshore fund transfers are a common and accepted practice, separate from money laundering activities.

They provide examples of various entities, such as e-commerce platforms, freelance services, consulting firms, small export companies, and travel agencies, that routinely engage in international money transfers without being associated with money laundering.

In their counterclaim, Eeon demands compensation from both Binance and the SEC.

They propose that the compensation should amount to 20% of the daily value of withheld funds per customer, totaling $1000 per day.

Additionally, Eeon asserts that both Binance and the SEC should equally share the responsibility of paying penalties, with $500 assigned to each party.

Cointelegraph has reached out to Binance for further information on the matter but has not yet received a response.

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