SEC signals appeal to crypto Ripple ruling in response to Terra case

The US Securities and Exchange Commission asked a federal judge to ignore parts of a recent ruling in the regulator’s litigation with Ripple Labs, saying the decision doesn’t square with existing securities laws and that it may appeal.

The ruling in the Ripple case concluded that sales of Ripple’s XRP token directly to institutional investors violated the SEC’s rules, but offerings to retail investors on exchanges didn’t, delivering what was widely seen as a victory to the crypto industry.

The SEC, in a fresh filing in its lawsuit against crypto company Terraform Labs and its co-founder Do Kwon, said the second piece “creates an artificial distinction between the expectations of sophisticated institutional and retail investors.” It “improperly transforms” a decades-old test for determining when assets are securities, known as the Howey Test, into a subjective standard. The agency asked the court to reject that part of the decision and signaled that it was considering an appeal in the Ripple case.

The SEC’s remarks came in response to a filing earlier this week from lawyers for Terraform Labs and Kwon that cited the Ripple ruling as support for their motion to dismiss the regulator’s lawsuit. While the two cases are separate, the attorneys said the Ripple decision “confirms the legal insufficiency of the SEC’s argument” that certain tokens, including the failed TerraUSD stablecoin, were securities because of the way they were sold.

The SEC sued Terraform Labs and Kwon in February, alleging they offered and sold unregistered securities as part of a fraudulent scheme that wiped out at least $40 billion worth of market value.

The firm’s once-popular TerraUSD, or UST, was designed to maintain a peg to the US dollar through an algorithm and trading in a sister token called Luna. The arrangement failed spectacularly when the stablecoin crashed last May, kicking off a domino effect that resulted in the bankruptcies of several other high-profile crypto companies — most notably, Sam Bankman-Fried’s FTX.

The SEC also told the judge in the Terraform Labs case that the part of the Ripple ruling dealing with sales to institutional investors works in the agency’s favor.

“Institutional buyers in this case, such as trading firms that purchased Defendants’ crypto assets with no restrictions on resale, purchased because they viewed the assets as an investment opportunity into Terraform’s efforts,” the regulator said.

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