The 'Torres Doctrine' is the law for at least two years, Crypto Law founder John Deaton writes.
André Beganski•
An appeal from the Securities and Exchange Commission (SEC) in its case against Ripple Labs does not represent a significant blow to Ripple's recent courtroom victory, according to crypto lawyer John Deaton.
“An appeal is not even close to a setback,” Deaton said, pushing back against a claim made on Twitter. “Don’t let anyone underestimate how significant this win is.”
Deaton’s comments came after federal district judge Analisa Torres ruled earlier this month that XRP, the token that powers Ripple’s payments network, is “not necessarily a security on its face”—except for instances when it was sold to institutions to raise funds.
Ripple has been engaged in a legal battle with the SEC since 2020, when the regulator accused Ripple of raising $1.3 billion in unregistered securities offerings.
SEC Chair Gary Gensler has said that he is “disappointed” with aspects of the decision, which could have far-reaching implications for other tokens facing regulatory heat. Court documents filed by the federal watchdog on Friday in its case against Terraform Labs suggested an appeal in the Ripple case could come soon.
Even then, it would take a considerable amount of time for the appeal to work its way through the court system, according to Deaton, the founder of Crypto Law.
“It will be two years from now before a decision is issued by the 2nd Circuit,” Deaton said. “The Torres Decision is the law until then.”
An appeal is not even close to be a setback. First, it will be two years from now before a decision is issued by the 2nd Circuit, if it’s appealed. The Torres Decision is the law until then – at least in the 2nd Circuit. Second, even if the 2nd Circuit said Torres was wrong… https://t.co/GzW31D9edQ
— John E Deaton (@JohnEDeaton1) July 22, 2023
Torres ruled that programmatic sales of XRP to public buyers fell short of fulfilling the Howey Test—a methodology used to determine whether an investment contract exists in the sale of an asset—because there wasn’t “a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.”
Public buyers of XRP didn’t know they were purchasing the token from Ripple due to the structure of programmatic sales, preventing any expectation of profit from being tied to Ripple’s efforts, Torres explained in her decision.
“It may certainly be the case that many programmatic buyers purchased XRP with an expectation of profit, but they did not derive that expectation from Ripple’s efforts,” Torres said. “None of the programmatic buyers were aware that they were buying XRP from Ripple.”
Even if the SEC successfully challenges Torres’ application of the Howey Test on this front, Deaton explained, Torres could still rule the same way when looking at the Howey Test’s other factors, such as the “investment of money” and the existence of a “common enterprise.”
That would only present a greater challenge for the SEC, Deaton claimed. It’s much harder for the SEC to satisfy that a common enterprise existed under the Howey Test as opposed to an expectation of profit derived from the efforts of others, he said.
Ripple CEO Brad Garlinghouse, who called the Torres ruling "an unequivocal win for Ripple and for crypto in the U.S.," separately picked at the SEC's attempts to be the lead regulator of digital assets.
"The SEC created this mess by proclaiming it was the cop on the crypto beat when it had no legal jurisdiction," he tweeted. "We all know legislation—not more regulation by enforcement—is the only way forward to provide clear rules and protect retail."
"A securities agency only has jurisdiction over securities—no security, no role for the SEC," replied Ripple Chief Legal Officer Stuart Alderoty. "Pretending to have jurisdiction when there is none is simply a political power play. It helps no one; it hurts everyone."
