At MicroStrategy's recent Bitcoin For Corporations event, Neil Maitra, partner at Dechert and former fintech and cryptocurrency specialist at the SEC, provided a deep dive into the jurisdictional complexities currently intertwined with cryptocurrency regulations, with a particular focus on ongoing litigation. For Ripple. . His insights are particularly noteworthy given his extensive background in both regulatory agencies and private law practice, including his time at Sullivan & Cromwell.
will ripple vs. Will the SEC “inevitably” go to the Second Circuit?
During the legal and regulatory session, Mitra discussed the varying judicial opinions on how secondary trading of cryptocurrencies like XRP should be legally classified. He stressed that this disparity in judicial opinion, especially within the Southern District of New York, demonstrates the uncertainty and complexity of current cryptocurrency regulations. “It's funny because three of the judges involved here were in the Southern District of New York. So, in one federal district, the judges can't agree on how to deal with this secondary trading of cryptocurrencies,” Maitra noted.
The primary issue at hand, as Mitra explained, revolves around whether transactions occurring on cryptocurrency exchanges constitute securities transactions under US law. Judge Analisa Torres, overseeing the Ripple case, made a distinction between primary and secondary transactions. In initial transactions, buyers purchase directly from Ripple and rely on Ripple's efforts for potential profits, clearly classifying these transactions as securities under the Howey Test.
However, Judge Torres said that secondary transactions, which take place anonymously on exchanges, are not automatically considered securities transactions. She described these as “blind transactions,” where the buyers are often unsophisticated investors unaware of who they are purchasing or the intricacies of Ripple’s underlying business operations.
In contrast, Judge Jed Rakoff and Judge Katherine Polk Failla in two separate cases (Terra Luna and Coinbase, respectively) took a broader view. They hypothesized that aggressive marketing strategies used by cryptocurrency companies could influence primary and secondary market transactions, thus potentially classifying secondary transactions as securities.
“The differing opinions among these justices underscore the nuances and evolving nature of cryptocurrency regulation,” Mitra explained. “It's inevitable that this (Ripple vs SEC case) will go to the Second Circuit and maybe even further, who knows, but there is still a long way to go in this particular decision just like with Coinbase,” he predicted. His observation highlights the ongoing debate and potential development of the case across senior judicial levels.
Mitra also highlighted the SEC's interpretation of the outcomes of these cases. Despite the setbacks in some of the rulings, the SEC does not view them as a repudiation of its general position on cryptocurrencies as securities. “The SEC does not necessarily see the Ripple case as a failure of its theory that secondary trading of cryptocurrencies is securities trading. They are of the opinion that perhaps we were not able to present the evidence well enough to convince the court and we will fix that at the Second Circuit level.”
🚨⚖️ 🚨𝗦𝗘𝗖 𝘃𝘀. 𝗥𝗶𝗽𝗽𝗹𝗲 🚨⚖️🚨
👤 Neil Mitra, Partner at Dechert / Former FinTech and Cryptocurrency Specialist at @SECGov /Formerly of Sullivan & Cromwell
⚠️ “” pic.twitter.com/DL4lksMoF6
– Subjective Views (@subjectiveviews) May 5, 2024
This perspective suggests that the SEC is preparing to improve its arguments and evidence in anticipation of further judicial reviews. This ongoing litigation not only impacts Ripple and other individual companies, but also sets critical precedents that could shape the regulatory landscape for the entire cryptocurrency market in the United States.
At press time, XRP was trading at $0.54259.
Featured image from YouTube/Bitcoin Magazine, chart from TradingView.com