Sen. Cynthia Lummis (R-Wyo.) tweeted her support of the Southern District of New York's decision in U.S. Securities and Exchange Commission (SEC) vs. Ripple Labs Inc., stating the decision aligns with her proposed legislation on regulating the cryptocurrency industry.
"I applaud the decision of the Southern District of New York finding that crypto assets traded in secondary markets may not be investment contracts," Lummis said in a statement she posted on Twitter July 14. "This is the position that section 501 of the Lummis-Gillibrand Responsible Financial Innovation Act has taken from the beginning."
Blockchain developer Ripple Labs, creator of the cryptocurrency token XRP, was accused by the SEC in 2020 of raising more than $1 billion when it sold XRP to investors in an unregistered security offering, with Ripple arguing XRP should not be treated as a security, based on comments by a previous SEC director, Investopedia reported July 13.
The court ruled July 13 that "XRP (and thus cryptocurrency) was not a security when sold to the public, but it is an unregistered securities offering when sold to institutional investors," Investopedia reports in the article.
The ruling left both parties "partially victorious," according to Investopedia, because although the decision granted the SEC control over cryptocurrency sales to institutions, exchanges can permit cryptocurrency trades based on the opinion that they are not securities transactions.
"XRP, as a digital token, is not in and of itself a 'contract, transaction[,] or scheme' that embodies the Howey requirements of an investment contract," District Judge Analisa Torres wrote in a court document.
The U.S. Supreme Court case SEC vs. Howey gave rise to the "Howey Test," which is used to decide if a transaction is an "investment contract" and thus would be determined to be a security per the Securities Act of 1922 and the Securities Exchange Act of 1934, according to Investopedia reporting. Investment contracts occur in financial investments in enterprises with a "reasonable expectation" of making a profit "derived from the efforts of others."
Sen. Lummis, in her statement, said the Southern District's decision proves that Congress needs to develop "a clear regulatory structure" for the crypto industry "that provides the highest level of consumer protection. We need to pass Lummis-Gillibrand to uphold the Howey test as interpreted by the Southern District of New York."
Lummis announced in a July 12 tweet that she and Sen. Kirsten Gillibrand (D-N.Y.) have reintroduced their bipartisan Responsible Financial Innovation Act, which would "create a federal regulatory framework that allows crypto businesses and investors to prosper here in America while protecting consumers from bad actors." She said the bill will "fully regulate crypto asset exchanges" by requiring them to register with the Commodity Futures Trading Commission (CFTC).
Current SEC Chair Gary Gensler restated that Bitcoin is a commodity, not a security, and is therefore under the purview of the CFTC, CryptoSlate reported in February, while “everything else other than Bitcoin is a security,” Gensler said in the article.
Ripple CEO Brad Garlinghouse said the Southern District court's ruling contradicts claims by the SEC that most crypto tokens are securities.
"Hoping yesterday’s decision is the wake-up call that Congress needs," Garlinghouse tweeted July 14. "This ruling directly undercuts the SEC’s claims that nearly all tokens are inherently securities – likely to set a positive precedent for other digital tokens in the U.S."
