SEC ‘Disappointed’ At Ripple Court Defeat

US Securities and Exchange Commission (SEC) chair Gary Gensler has said the regulator is “disappointed” with a judge’s ruling last week that found crypto tokens from Ripple Labs did not necessarily constitute securities.

The ruling was a major blow to the SEC’s efforts to regulate cryptocurrencies under existing federal securities laws, which crypto firms have long argued do not apply to them.

Gensler said in prepared remarks that the agency was still assessing the decision by US District Judge Analisa Torres but that it was pleased with a portion of the ruling that found Ripple had violated securities laws when it sold about $728.9 million (£557m) of its XRP tokens directly to institutional investors.

The New York federal judge found that, by contrast, the same tokens did not constitute securities when offered on public exchanges.

Regulatory challenge

In that case purchasers did not have a reasonable expectation of profit that depended solely on Ripple’s efforts, and indeed “could not have known if their payments of money went to Ripple, or any other seller of XRP”.

The SEC had sued Ripple in 2020 arguing its entire $1.3bn sale of XRP tokens constituted an unregistered securities offering.

The ruling was the SEC’s first major setback in a decade of enforcement of cryptocurrencies, and is expected to be used by other firms facing enforcement actions – such as exchanges Binance, Bittrex and Coinbase  – to argue they do not fall under the agency’s jurisdiction.

Unlike commodities, securities are highly regulated and carry stringent requirements such as registration with the SEC and disclosure to investors of potential risks.

‘New thinking’

Gensler also discussed the regulatory challenge posed by technologies such as predictive analytics and machine learning, which he said could increase the interconnectedness of the financial system in ways that risk management models may not be prepared for.

“Many of the challenges to financial stability that AI may pose in the future … will require new thinking on system-wide or macro-prudential policy interventions,” Gensler said.