On July 13, 2023, United States District Court Judge Analisa Torres ruled that Ripple’s XRP token should not be considered a security when sold on retail digital asset exchanges.
Ripple’s Chief Legal Officer Stuart Alderotti told Cointelegraph that last week’s decision made it clear that the US Securities and Exchange Commission’s (SEC) theory that a token can be an investment contract and, therefore, a security, is no longer supported in law.
He said of the decision: “This is not only a huge win for Ripple, but it is a win for all crypto in the United States. The SEC can no longer boast of its record in crypto, which until now has, by and large, been in agreement with players who didn’t have the resources to fight back.
While that may be the case, New York Representative Richie Torres told Cointelegraph that Ripple’s decision highlights a cruel irony in securities law. They said:
“It protects institutional investors while exposing retail clients, even though the latter arguably require more protection than the former. To me, the lack of protections for retail investors underscores the acute urgency of passing a market structure bill to protect the average American consumer.
Torres elaborated on this remark, commenting on his plans to help pass the crypto market structure bill and his support for blockchain technology and cryptocurrency innovation.
Crypto regulation enforcement had a dreadful day in court.
In light of the landmark SDNY decision in the Ripple case, @SECGov should re-evaluate its reckless regulatory assault on the crypto industry.
My letter to Chair Gensler: pic.twitter.com/Mrk63N4KhH
— Rep. Richie Torres (@RepRitchie) 18 July 2023
Cointelegraph: Can you please explain the meaning behind the recent XRP court ruling?
Torres: The decision for the Southern District of New York makes two important distinctions. First, it distinguishes between securities and assets that are part of investment contracts, which qualify as securities under the Howe test. This decision establishes what I describe as the “Torres Rule,” which holds that digital assets are not themselves securities that can be sold as investment contracts that qualify as securities under the Howe test.
Secondly, it differentiates between institutional buyers and retail buyers. If you are an institutional buyer who buys a crypto token directly from an issuer or promoter, that transaction is a security offering. But, if you are a retail customer buying crypto tokens on an exchange, that transaction is separate from an investment contract and outside the purview of securities law.
whistle: You noted that the lack of protections for retail investors underscores the acute urgency of passing a market structure bill to protect the average American consumer. please explain
RT: The US House Financial Services Committee is currently considering two bills. One is about stablecoins, and the other is about market structure. The combination of the Ripple decision and the Market Structure Bill will create a rigorous yet workable framework for regulating digital assets.
Ripple’s decision protects the crypto industry from arbitrary enforcement action and the practice of regulation by Gary Gensler’s enforcement, but a crypto market structure bill would protect retail investors from real bad actors.
CT: What are you doing to help ensure the passage of the crypto market structure bill?
RT: I am actively negotiating with Republicans on the House Financial Services Committee to correct the crypto market structure bill. There is no substitute for legislation, and Gary Gensler’s strategy for regulation has put retail customers at risk.
However, I do think that both Congress and the SEC should make an effort to remain merit neutral with regard to cryptocurrencies. It is not the role of policymakers to determine the usefulness of blockchain technology to society. Rather, our role is to create a framework for regulating digital assets and protecting investors and consumers. This is our mandate regardless of personal feelings about the usefulness of crypto.
CT: What are your thoughts on cryptocurrencies and blockchain technology?
RT: I personally believe that blockchain technology and cryptocurrencies have the potential to create a better, cheaper and faster payment system, enabling a new layer of the Internet, commonly known as Web3. But for the battle for crypto and blockchain to be likely to succeed, a regulatory framework and clarity are needed. Clarity is the cornerstone of compliance.
CT: Final thoughts?
RT: Even after the Ripple case, the status quo remains unacceptable as retail customers are exposed. So I have two objectives. The first objective is to protect crypto innovators from enforcement by regulation, which the Ripple decision fulfills. The second objective, and most important, is to protect retail customers. This is where the need for legislation now comes in.