Terraform Labs opinion rains on Ripple decision parade

Federal judges in the Southern District of New York disagree on how to apply the Howey test to crypto assets


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The crypto industry has been in high spirits after a federal judge ruled that programmatic sales of Ripple’s XRP token are not classified as securities. A dueling opinion from a different federal judge issued Monday however may burst crypto fans’ bubble. 

In a 50-page opinion denying Terraform Labs’ motion to dismiss the SEC’s complaint, Federal Judge Jed Rakoff strayed from the line of reasoning established in Ripple’s case. All purchasers, regardless of if they were institutional buyers or re-sale purchases, had a reasonable expectation for profit, Rakoff said. 

Judge Analisa Torres, who serves the Southern District of New York alongside Judge Rakoff, ruled in the Ripple v. SEC case last month that although Ripple’s initial institutional offering of XRP tokens was a securities offering, the programmatic sales of XRP — for example, sales on an exchange — were not. 

Torres’ rationale was that people who bought XRP on exchanges had no way of knowing whether their capital contributions benefited Ripple

“The vast majority of individuals who purchased XRP from digital asset exchanges did not invest their money in Ripple at all,” Torres wrote in her opinion. “An Institutional Buyer knowingly purchased XRP directly from Ripple pursuant to a contract, but the economic reality is that a Programmatic Buyer stood in the same shoes as a secondary market purchaser who did not know to whom or what it was paying its money.”

Read more: Ripple has cracked the SEC’s exterior — sit back and watch it crumble

Torres notably did not make a ruling on secondary sales as whole, as this was not a question before the court. Her ruling was on the matter of programmatic sales. 

Radkoff disagreed, however. He argued in the Terraform Labs case that all sales of tokens, regardless of venue, went toward building the Terraform blockchain and generating profit for all 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,” Radkoff wrote. 

Legal experts were not shocked that the two judges came to different conclusions, and they warned industry members to be wary of both, as neither sets a precedent. 

“Even before the Terraform ruling this week, the enthusiasm in the crypto market following the Ripple rulings was overblown in light of the substance of the rulings themselves,” said Joe Castelluccio, head of fintech and digital assets, blockchain and crypto at Mayer Brown. 

“The Terraform ruling underscores that there are many ongoing enforcement actions alleging that the sale or trading of certain digital assets constitutes a violation of the Securities Act and other US laws.” 

Mark Hiraide, a partner at Mitchell Silberberg & Knupp, agreed, adding that Torres’ unusual take was particularly remarkable. 

“We’ve had basically 90 years worth of federal securities jurisprudence,” Hiraide said. “So that was what was so surprising about Judge Torres’ [summary judgment], in my view, it was an unprecedented application of Howey.” 

Neither Torres’ nor Radkoff’s opinions set a precedent for future cases. Either case must go to trial and then be appealed to the second circuit court to establish a precedent within the circuit. Courts in different circuits are not obligated to follow the ruling. 

“As far as the possibility that other judges all over the country are going to make their own decisions, unfortunately, that’s always the case,” Hiraide added.

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