By Jody Godoy and Chris Prentice
(Reuters) -A cryptocurrency developer's landmark legal victory against the U.S. Securities and Exchange Commission (SEC) will galvanize Coinbase (NASDAQ:COIN) and other companies to resist the agency's attempt to assert its jurisdiction over the industry, experts said.
Thursday's ruling that Ripple Labs Inc did not violate securities law by selling its XRP token on exchanges was the first major setback for the SEC in a decade of enforcement against the cryptocurrency industry. Other crypto firms accused of illegally operating digital asset exchanges are exploring ways to take advantage of the ruling, according to two sources familiar with the matter who asked not to be named because they were not authorized to speak publicly.
The crypto industry is in a tug-of-war with the SEC and its Democratic chair Gary Gensler, who has described the crypto market as a "Wild West" riddled with fraud. Saying most crypto tokens are securities, the SEC has cracked down on crypto trading platforms, including the top U.S. exchange Coinbase, in an effort to bring the industry under its oversight.
Crypto firms have long disputed the SEC's jurisdiction but until Thursday no court had supported that view. Now, industry lawyers have ammunition to fight back.
"This case will cause people to rethink, and I think it already has," said Robert Frenchman of Mukasey Frenchman LLP.
The two sources, for example, said firms are considering ways to use the Judge's ruling for their defense. "I can’t imagine any of the exchanges won’t use this in some way," said one.
In 2020, the SEC sued San Francisco-based Ripple and its current and former chief executives, alleging they conducted a $1.3 billion unregistered securities offering by selling XRP, which Ripple's founders created in 2012.
U.S. District Judge Analisa Torres in New York on Thursday ruled its sales on public cryptocurrency exchanges were not offers of securities because purchasers did not have a reasonable expectation of profit that depended on Ripple's efforts, a key factor in determining if XRP was a security at the time. However, she also ruled Ripple's direct sales of XRP to investors should have been registered as securities, handing the SEC a partial victory.
Crypto proponents viewed the decision as a watershed and the judge's reasoning as a new line of defense for the likes of Coinbase, Binance, Bittrex and other exchanges targeted by the SEC on the basis they were trading securities.
"It bolsters Coinbase's and Binance's arguments that the digital assets that are traded on those exchanges would not be deemed securities," said Teresa Goody Guillén of Baker & Hostetler in Washington.
Spokespeople for Coinbase and Bittrex did not respond immediately to requests for comment. Binance declined to comment, as did a spokesperson for the SEC.
The SEC's Gensler said in remarks on Monday that the regulator is "disappointed" with the part of the ruling that was in Ripple's favor.
SEC APPEAL?
While the cryptoverse was celebrating, some legal experts said they believe the SEC will challenge the ruling in the 2nd U.S. Court of Appeals to stop judges hearing other cases from ruling that other crypto assets sold on exchanges are not securities.
"The stakes are too large, especially in light of cases against Coinbase and other issuers for the SEC to let this opinion stand," said Carol Goforth, a law professor at the University of Arkansas.
Ripple Chief Legal Officer Stuart Alderoty said in an interview with Reuters that the company "wouldn't shy away from an appeal, because the judge was right on her core findings," adding: "I believe any appellate court looking at this would amplify and endorse those rulings, which would certainly be welcome," he said.
Experts agreed that an appeal carried risks for the SEC.
If the 2nd Circuit, whose rulings are binding on federal courts in New York, Connecticut and Vermont, adopts the logic in the Ripple ruling, much of the Coinbase case is "toast," said Philip Moustakis, an attorney at Seward & Kissel.
"It presents a substantial risk that their jurisdiction over the crypto markets will be constricted if they appeal and lose," he said.