As the cryptocurrency community eagerly awaits the conclusion of the courtroom standoff between Ripple and the United States Securities and Exchange Commission (SEC), a banking law expert has highlighted the issue with the use of the Howey Test to determine what is or isn’t an investment contract, which could lead the regulator to lose its “war against crypto.”
Indeed, Todd Phillips pointed to an argument from the motion to dismiss in the SEC lawsuit against former Coinbase bosses Ishan and Nikhil Wahi, which indicates that Howey isn’t the best way to decide what is an “investment contract,” according to the legal expert’s tweet thread published on April 8.
Threat to SEC authority?
As he stressed, “You also need a contract, post-sale legal obligations, and the right to share profit. If this becomes the test, then crypto assets are most likely commodities, giving the [Commodity Futures Trading Commission (CFTC)] jurisdiction.”
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On top of that, using this argument would be a heavy blow to the SEC’s authority, not just in terms of regulating the crypto industry, but with much wider implications, in addition to its use in other court cases, such as against the crypto exchange Coinbase:
“If the SEC loses to this [argument], it could affect the SEC’s authority over non-crypto assets. Idk how deep a cut that would be, but the SEC wouldn’t be happy. Anyway, my guess is this is the argument Coinbase will use when the SEC sues it, and imo that case, is going to [the Supreme Court of the US (SCOTUS)].”
Ripple defense on the offense
Meanwhile, on April 9, a legal expert and amicus curiae for the blockchain company, John E. Deaton, cited Phillips’s tweet, saying that the Ripple defense team had already made this argument and that “we are waiting for Judge Torres’ decision any day now. Coinbase also adopted the argument in its Amicus Brief in [Wahi].”
Earlier, on April 6, Scott Chamberlain, a former lawyer and co-founder of the permissionless Layer 2 platform Evernode XRPL, argued that the case “would have settled long ago” if the SEC didn’t allege that the XRP token was a security, but only that Ripple sold XRP as an investment contract.
Deaton’s firm CryptoLaw also stated that crypto “can’t be an investment contract for those who acquire a token on the secondary market for consumptive use and with no knowledge of, interest in or rights from whoever previously sold it on chain,” in a comment to the SEC Chairman Gary Gensler’s video shared by Susan Friedman, the International Policy Counsel at Ripple.
At the same time, lawyer Bill Morgan revealed that the SEC’s own expert had admitted that the price movements of Bitcoin (BTC) and Ethereum (ETH) could explain as much as 90% of fluctuations in the XRP value since mid-2018, which he considered “surprising,” as Finbold reported on April 8.
As things stand, XRP is currently changing hands at the price of $0.51, which represents an increase of 0.36% in the last 24 hours but a 2.79% decline over the week, as the digital asset still holds on to the gains of 36.05% accrued across the past month.
