US law protects institutions and exposes retail investors

On July 13, 2023, United States District Court Judge Analisa Torres ruled that Ripple’s XRP (XRP) token should not be considered a security when sold on retail digital asset exchanges.

Stuart Alderoty, chief legal officer at Ripple, told Cointelegraph that last week’s ruling makes it clear that the U.S. Securities and Exchange Commission’s (SEC) theory that a token can be an investment contract and, therefore, a security, no longer has support in the law.

He said of the ruling: “That is not only a huge win for Ripple, but it’s a win for all of crypto in the United States. The SEC can no longer tout their record in crypto, which was, up till now, by and large, settlements with players that didn’t have the resources to fight back.”

While this may be, New York Representative Ritchie Torres told Cointelegraph that the Ripple decision reveals a cruel irony in securities law. He said:

“It protects institutional investors while leaving retail customers exposed, even though the latter arguably requires more protection than the former. For me, the lack of protection for retail investors underscores the fierce urgency around passing a market structure bill to protect the average American consumer.”

Torres elaborated on this remark, commenting on his plan to help ensure the passing of a crypto market structure bill, and his support for blockchain technology and cryptocurrency innovation.

Crypto regulation by enforcement had a dreadful day in court.

In light of the SDNY’s landmark decision in the Ripple case, @SECGov must reassess its reckless regulatory assault on the crypto industry.

My letter to Chair Gensler: pic.twitter.com/Mrk63N4KhH

— Rep. Ritchie Torres (@RepRitchie) July 18, 2023

Cointelegraph: Can you please explain the meaning behind the recent XRP court ruling?

Torres: The Southern District of New York’s decision makes two critical distinctions. First, it draws a distinction between securities and assets that are part of investment contracts, which qualify as securities under the Howey test. The decision establishes what I describe as the “Torres Rule,” which holds that digital assets are not in themselves securities that can be sold as investment contracts that qualify as securities under the Howey test.

Secondly, it distinguishes between institutional buyers and retail buyers. If you are an institutional buyer that purchases a crypto token directly from an issuer or promoter, then that transaction is a security offering. But, if you are a retail customer purchasing a crypto token on an exchange, that transaction is different from an investment contract and falls outside the scope of securities law.

CT: You mentioned that the lack of protection for retail investors underscores the fierce urgency around passing a market structure bill to protect the average American consumer. Please explain.

RT: The U.S. House Financial Services Committee is presently considering two bills. One is about stablecoins, and the other is about market structure. The combination of the Ripple decision and the market structure bill would create a rigorous yet workable framework for regulating digital assets.

The Ripple decision protects the crypto industry from arbitrary enforcement action and from Gary Gensler’s practice of regulation by enforcement, but a crypto market structure bill would protect retail investors from bonafide bad actors.

CT: What are you doing to help ensure the passing of a crypto market structure bill?

RT: I have been actively negotiating with the Republicans in the House Financial Services Committee to get the crypto market structure bill right. There is no substitute for legislation, and Gary Gensler’s strategy for regulation has put retail customers at risk.

However, I think that both Congress and the SEC should strive to be merit neutral with respect to cryptocurrency. The role of policymakers is not to determine the utility of blockchain technology for society. Rather, our role is to create a framework for regulating digital assets and protecting investors and consumers. That’s our mandate regardless of personal feelings about the utility of crypto.

CT: What are your thoughts on cryptocurrency and blockchain technology?

RT: I personally believe that blockchain technology and cryptocurrency have the potential to create a better, cheaper and faster payment system, while enabling a new layer of the internet commonly known as Web3. But in order for crypto and blockchain to have a fighting chance of succeeding, a regulatory framework and clarity is required. Clarity is the cornerstone of compliance.

CT: Final thoughts?

RT: Even after the Ripple case, the status quo remains unacceptable because retail customers are exposed. Therefore, I have two objectives. The first objective is to protect crypto innovators from enforcement by regulation, which the Ripple decision accomplishes. The second objective, and most importantly, is to protect retail customers. That is where the need for legislation now comes into play.

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