New Ruling Contradicts Ripple's Case Decision, Impacting Cryptocurrency Market

A new decision by the U.S. District Court for the Southern District of New York has expressly disagreed with the same Court’s opinion in the Ripple case, which the blockchain industry viewed as a revolutionary opening of the exchange market for various types of tokens.

The Ripple order distinguished between direct sales and sales through exchanges, holding that the latter were not investment contracts (and therefore securities) because buyers did not know that their money was going to Ripple and hence did not invest their money based on promises made by Ripple (third prong of the Howey test).

This new opinion, written by another judge of the same Court in SEC vs. Terraform Labs (UST/LUNA), holds that even “in a secondary re-sale transaction” a reasonable buyer may infer a promise of profit based on the efforts of others from statements made by the token’s issuing company, especially when that company embarks “on a public campaign to encourage both retail and institutional investors to buy their crypto-assets by touting the profitability of the crypto-assets and the managerial and technical skills that would allow the defendants to maximize returns on the investors’ coins.”.

In any token you are likely to find these kinds of statements from the promoters, developers and prominent individuals of a blockchain project. Now, with this latest decision, these statements could translate into an investment contract, and thus a security, not only in direct sales by the issuer but also in market sales between investors, with important consequences for exchange operators and hence for the blockchain market as a whole.

Perhaps a distinguishing factor can still be made, as an anchor of the Court’s decision is that “the defendants said that sales from purchases of all crypto-assets -- no matter where the coins were purchased -- would be fed back into the Terraform blockchain and would generate additional profits for all crypto-asset holders. These representations would presumably have reached individuals who purchased their crypto-assets on secondary markets –- and, indeed, motivated those purchases -- as much as it did institutional investors.”.

The issue of token trades on exchanges still seems far from reaching a conclusive resolution.

The SEC has announced an appeal against the Ripple order.

The U.S. District Court for the Second Circuit, hopefully, will clarify the matter.

Even before the full implementation of the EU MiCA regulation, which is currently undergoing a public consultation for the issuance of its first implementation package, the qualification of a token as a security under U.S. law may have implications in European legal systems, also under the rules of private international law.