XRP: Blockchain Association’s Jake Chervinsky Explains Why ‘The SEC Is Wrong About The Law’

On Friday (October 28), Jake Chervinsky, who is the Executive Vice President and Head of Policy at the Blockchain Association, an advisor to the Variant Fund and a board member of the DeFi Education Fund, explained why the US SEC’s views are “wrong as a matter of law and policy.”

As you may recall, on December 22, 2020, the SEC announced that it had “filed a case against Ripple Labs Inc. and two of its executives, who are also significant security holders, alleging that they raised over $1.3 billion through an unregistered ongoing digital asset securities offering.”

Yesterday, the Washington, DC-based Blockchain Association (representing “the recognized leaders of the US blockchain and cryptocurrency industry”) filed an amicus brief supporting a correct interpretation of Howey” in the SEC’s ongoing lawsuit against Ripple.

In its press release, the Blockchain Association stated 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 Howey test” and that “a ruling adopting the SEC’s view of the law would expand the landscape of assets considered securities in a manner inconsistent with the Supreme Court’s intent in Howey.”

Kristin Smith, CEO of the Blockchain Association, had this to say:

“The SEC’s broad, haphazard interpretations of the securities laws currently stand as the single greatest threat to the future of this fast-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 By erratically applying these outdated standards to a modern and innovative technology, the SEC continues its “regulation by enforcement” pattern, punishing crypto companies with little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 that alleged the crypto company had not registered 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.

“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.“

In a Twitter thread posted yesterday, Chervinsky said that in the Blockchain Association’s 30-page brief, they explain in detail why the SEC’s views “are wrong as a matter of law and policy.”

Here are some highlights of why the Blockchain Association believes the SEC’s interpretation of the Howey test in this case is wrong:

“The fatal flaw in the SEC’s position is its failure to distinguish primary sales from downstream transactions in the secondary market. The SEC ignores the difference between promises that come with a token sale (perhaps a security) and the token itself (never a security).

“As a result, the SEC doesn’t even seem to bother analyzing whether secondary sales of XRP qualify as securities transactions, despite alleged violations throughout today. Instead, the SEC apparently takes the position of “once a security, always a security, no matter what.”

“The SEC instead relies on an extremely broad view of Howey, far beyond what the law supports. The SEC is taking a test meant to define a specific type of relationship between transaction partners and reimagining it to capture pretty much every asset in the world with a market price… Apparently to justify expanding its own authority over crypto as much as possible, the SEC stretches all four branches of Howey beyond the limits of logic and legal precedent.“

Chervinsky ended his Twitter thread by saying:

“I wish the SEC would take more sensible positions on crypto, but until then, unfortunately, there is no choice but to fight this in the courts. This case could result in an important precedent affecting the entire industry. I hope our letter helps the Court get the law right.“

In a recent interview, Deborah McCrimmon, who is Vice President of Litigation and Employment at Ripple, spoke about this lawsuit.

Ripple’s Deputy General Counsel, who joined Ripple as Employee #210 (Director of Litigation) around August 2018, made his comments during an interview published in Modern Counsel on October 17, 2022. Below are some highlights from that interview:

• “I learned about Ripple and all their big goals of trying to improve and build and achieve this valuable internet. It resonated with me. I wanted to be a part of it.“
• “We have been litigating with the SEC on this issue since late 2020, and we strongly believe that the SEC is wrong on both the facts and the law.“
• “They are reaching way beyond the authority given to them by Congress and trying to regulate a space that Congress never intended for them to regulate.“
• “It is a ground-breaking, industry-defining case. It’s going to be precedent-setting, not just for Ripple, but for the entire crypto industry. It is monitored by the entire industry.“

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