“In December 2020, the SEC said it would sue Ripple, former CEO Christian Larsen, and current CEO Brad Garlinghouse for allegedly raising $1.3 billion through unregistered securities sales using XRP. This announcement was made almost two years ago” [LollyCrypt. Blockchain Association supports Ripple in its case with SEC. (Accessed October 31, 2022)].

“United States-based crypto advocacy group Blockchain Association has come out in support of Ripple Labs amid its ongoing legal battle with the Securities and Exchange Commission (SEC), claiming the case could be very important for the future of the crypto industry. In an Oct. 28 post, the advocacy group announced it will ‘stand’ with the American crypto economy by filing an amicus brief, also known as ‘friend of the court,’ in the SEC enforcement action against Ripple” [Katte, S. Blockchain Association throws support behind Ripple in SEC duel. (Accessed October 31, 2022)].

In the October 28 post, the Blockchain Association wrote that the basis for their position is that:

This case, which is just one in a long line of SEC efforts to regulate by enforcement, highlights the SEC’s efforts to cement and legitimize its overly broad interpretation of the Howey test. A ruling that adopts the SEC’s view of the law would expand the landscape of assets that are considered securities in a manner contrary to the Supreme Court’s intent in Howey.

[Blockchain Association. Blockchain Association Files Amicus Brief in SEC Lawsuit Against Ripple. (Accessed October 31, 2022)].

Executive Director of Blockchain Association, Kristin Smith, addedthe following statement to the announcement post. Her statement, set forth here at length, is as follows:

The SEC’s broad, haphazard interpretations of the securities laws currently stand as the single greatest threat to the future of this rapidly growing industry. By erratically applying these outdated standards to a modern and innovative technology, the SEC continues its “regulation by enforcement” pattern, punishing crypto companies with little justification or warning. This is exactly the case with Ripple, which the SEC targeted nearly two years ago in an enforcement action alleging that the crypto company had failed to register a digital token as a security. The SEC must follow the law, they cannot impose their draconian view on the entire crypto ecosystem through an enforcement action. Ripple’s decision to fight this case in court provides an opportunity for the industry to push back against the SEC’s regulation by enforcement agenda and open the door to modernized standards for the industry.

[Id].

For those unfamiliar with amicus briefs, they are “[…] a request by a person or organization (who is not party to the case) to submit a brief (written information) which could provide context or insight into the previously disclosed details of the case. It does not provide new facts or evidence. It is intended to influence the court’s decision. The brief contains examples which show how crypto tokens are being used outside the bounds of investment contracts” [Allen, N. Blockchain Association files amicus brief in SEC v Ripple case. (Accessed October 31, 2022)].

The Amicus Brief filed by the Blockchain Association should prove to be a fascinating read for anyone with even a slight interest in the Ripple case. A full copy of the brief may be accessed by clicking here.

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The amicus brief filed in this case clearly summarizes the contents of its legal arguments as follows:

Statements made by the Securities and Exchange Commission (the “SEC”) in this case and others illustrate that it views the United States securities laws, and in particular the registration provisions, as applying beyond the initial ‘investment contract’ between the issuer of a blockchain product and its primary purchasers. In other words, even if an initial token issuance qualified as an investment contract, and thus had to be registered (or qualify for an exemption) under Section 5 of the Securities Act of 1933, the SEC seems to believe that that token remains a ‘security’ through further, downstream transactions, no matter what rights the initial purchaser kept for themselves (vis-à-vis the seller) before selling the token downstream, why the downstream user purchases that token, or how that token is used.

[…] Put simply, that view should not be – cannot be – the law. A token is a piece of software. There is no doubt that anything, even software, can be issued as part of an investment contract. There is also no doubt that the software itself, transferred without any legal rights at all, is not that
investment contract.

[Blockchain Association. Amicus Brief at pp.10-11. (Accessed October 31, 2022).

The Blockchain Association expands on this general argument by adding:

The SEC’s extremely broad interpretation of the securities laws would have devastating effects on the industry (and even outside the industry). Market participants acquire tokens in many different ways, and use them for many different purposes. Many of those methods or uses have nothing to do with primary sales or distributions of tokens, such as payment for goods and services, conveyance of intellectual property rights, inventory tracking and other “back office” functions, or for a specific purpose in a given blockchain project. In fact, numerous other examples from the industry demonstrate how tokens are used in practice, outside the ambit of anything that could possibly be considered an investment contract. Indeed, much of the industry focuses on building digital networks that utilize tokens that are not designed or intended to qualify as securities. Applying the securities laws to those tokens – whether or not through the prism of the Howey test – would significantly restrict those networks from functioning. In this case, a ruling not narrowly tailored to the particular facts at issue could create havoc across a wide array of individuals and entities in the blockchain space.

[Id at pp. 11-12]

The brief then continues on with an examination as to why a Court should consider the particular purpose of a token in reaching a determination whether or not said token is a security. To overly simplify the remaining legal arguments presented in the brief they are listed as follows in bullet format without details. Page Numbers wherein the various specific arguments are located in the brief are provided.

• “THE SEC UNLAWFULLY INCLUDES SECONDARY SALES AS EVIDENCE OF AN INVESTMENT CONTRACT” [Id at pp 17-19].

• “UNDER THE HOWEY TEST, MANY SECONDARY MARKET TRANSACTIONS IN TOKENS ARE NOT SECURITIES TRANSACTIONS” [Id at pp 19-29].

• “THE RIPPLE DEFENDANTS’ FAIR NOTICE DEFENSE RAISES CONCERNS THAT ARE COMMON IN THE INDUSTRY” [Id at pp 29-35].

• “UNDER MORRISON, THE SECURITIES LAWS ARE INAPPLICABLETO
  EXTRATERRITORIALTOKEN TRANSACTIONS” [Id at pp 35-39].

“The Blockchain Association said the case gives the industry the chance to push back against what they see as the “SEC’s regulation by enforcement agenda” and potentially open the door to modernized standards for the industry” [Katte, supra].