SEC Plans to Appeal XRP Judgement — Pro-Crypto Attorney John Deaton Weighs In

Key Takeaways

• The SEC may appeal the July 2023 ruling that deemed secondary sales of XRP as non-security.
• Pro-crypto lawyer said the SEC’s appeal won’t make much difference.
• The SEC may appeal the ruling on Howey Test technicalities.

The U.S. Securities and Exchange Commission (SEC) reportedly plans to appeal the judgment in the Ripple (XRP) lawsuit. However, pro-crypto attorney and Republican primary winner from Massachusetts, John Deaton, believes the SEC has no grounds to do so except to stall the case further.

Judge Torres ruled in July 2023 that the secondary sale of XRP doesn’t constitute a security, giving significant relief to Ripple, which has been fighting the SEC battle for over four years.

SEC Believes XRP Ruling Was Wrong

According to FOX reporter Eleanor Terrett, a former SEC attorney revealed that the agency will probably appeal Judge Torres’s July 2023 “ruling concerning the XRP programmatic sales in the Ripple case.”

The former SEC lawyer revealed that many at the SEC believe Judge Torres’s decision was wrong:

“Everyone over there [at the SEC] truly believes that the decision is wrong, that it’s not good law, and should be appealed.”

While the lawyer didn’t reveal what the agency thought was wrong with the ruling or the basis of the appeal, many in the crypto community were confident that the securities regulator would eventually appeal against it.

The SEC filed a lawsuit against Ripple in December 2020 under the outgoing chief, Jay Clayton, who exited the agency in January 2021. It was the first major lawsuit brought by the SEC against a well-established crypto business. The lawsuit prompted several U.S.-based crypto exchanges to delist XRP from their platform.

The lawsuit continued for nearly three years before the judge ruled that the secondary sale of XRP to retail customers was not a security.

SEC’s Howey Test Argument Is Baseless

Deaton was integral to the SEC Ripple lawsuits and litigated for over two and a half years. He said that the SEC may use the Howey test as an argument to appeal in the case.

According to Deaton, the judge didn’t apply all three factors (four, considering the third factor has two prongs) of the Howey Test. 

The Howey Test is a legal framework that helps regulators determine if a transaction is an investment contract and falls under the security category. The Howey Test has four criteria, or prongs, and a transaction must meet all four to be considered a security:

• Investment of money: The transaction involves spending money or other assets.
• Expectation of profits: Investors expect to make money from their investment.
• Common enterprise: There is a shared venture between the investors and those offering the investment.
• Reliance on the efforts of others: The expected profits are mainly from the work of others. 

If a transaction fulfills all four criteria, it is considered a security. However, in the Ripple XRP lawsuit, the judge didn’t apply the third prong, i.e., common enterprises. Deaton believes the SEC could use this to appeal in the case, but it won’t make much of a difference:

“There could be a scenario where secondary sales could qualify as investment contracts because the facts meet all the Howey factors. But in the Ripple XRP case, the facts presented don’t satisfy it. Thus, the case gets affirmed on appeal but it doesn’t prevent the SEC from arguing secondary sales constitute investment contracts in other cases.”

Deaton said the argument that the judge didn’t apply the “common enterprise” prong won’t hold, as the court has ruled that the secondary sale of XRP is not security, thus nullifying the Howey criteria.

SEC Appeal Against XRP Ruling Will Be Waste of Taxpayer’s Money

The pro-XRP lawyer also shed light on the scenario where an appeal court could rule that the judge erred in not applying the “common enterprise” prong. In that scenario,  the case would go back to Judge Torres for her to apply the common enterprise prong, and she would likely rule that the SEC didn’t establish a common enterprise.

“If that happened, the SEC would lose AGAIN and then have to appeal all over. It makes no sense to appeal this ruling!”

On the other hand, if the judge rules in favor of the SEC, Ripple can appeal the case. Thus, the SEC’s appeal would only prolong the case, wasting taxpayers’ money.

“It makes no sense and would be a total waste of taxpayer money to appeal this decision, which is why someone like Gary Gensler might just appeal.” 

The SEC has also recently amended its definition of security related to crypto tokens. The agency recently amended the Binance complaint, admitting to using the term “crypto token securities” and promised to avoid using it.