This is Bloomberg Law with June Brusso from Bloomberg Radio. Cryptocurrency scored a victory over the Securities and Exchange Commission when a federal judge ruled that Ripple Labs XRP token is a security when sold to institutional investors, but not the general public. Ripple's CEO, Brad Garlinghouse said it was a victory for Ripple and the industry.
The sec clearly lost as a matter of law, and the judge wrote XRP is not a security as a kind of intrinsic thing. In certain circumstances, which is a kind of a narrow definition around institutional sales, it could be a security. So look, the market reacted in a very positive way. Certainly, Team Ripple's very happy with the decision.
Joining me is securities law attorney Robert him a partner at Tartar krinskyin Drogan How important is the decision in this Ripple case for determining regulatory authority over crypto assets?
Well, the decision in the Ripple case is usually important because it really shifts the legal landscape in terms of how the United States may start looking at regulating cryptocurrency. Up till now, the SEC has been the primary enforcer, and it's been using enforcement actions, which is called regulation by enforcement, to try to help define the parameters of what companies and investors can do in terms of developing
new cryptocurrencies and selling new cryptocurrencies. And this has created a huge problem for the industry because without any rules of the road, it's inherently gone to stifle innovation and hold back investors from investing in new crypto projects until there's more clarity about whether you're sale and the promotion of these products is in fact legal. So this is going to be a big game changer in my opinion with regards to how cryptocurrency is regulated in the United States.
But this is a ruling by one judge. Are people reading too much into this? Should we wait for an appellate court ruling? I mean, do other judges in Manhattan even have to follow this decision?
Well, no, other judges don't technically have to follow this decisions. But the decision itself is very well written and the reasoning behind the decision, perhaps even more importantly, is very logical and I think will be very persuasive to other judges. What happened in the Ripple case is that this judge, like many others, Judge Torres, went to an old Supreme Court case Howie case set up this test to see when is a particular financial instrument of security and when
is it not a security? And there's various elements to that test. But the judge in the Ripple case held that the XRP token did not meet the definition of a security at least the extent that it was sold on crypto exchanges to investors in the aftermarket. And I think that reasoning is going to be very persuasive to other judges, particularly as the SEC continues to try to do regulation by enforcement, as we could see with its recent cases against Coinbase and Bittrex, which are crypto exchanges.
The SEC chair Gary Gensler, said he was both pleased and disappointed. Tell us about why there's a little bit of it that he might be pleased with.
There is some sunshine for the SEC in the Rippled decision. Not much, but there is some because it was only a partial victory for Ripple, and the procedural context is is that this decision came out on a motion for some rejudgment, which happens after all the discovery in the case has taken place, and we have to remember that this case the SEC originally filed against Ripple in December twenty twenty, so it's been about two and a half years of litigation and discovery. So there's a very well
developed record that the judge made her decision on. And what happened here is that the judge really, in a sense, gave the decision to Ripple. What she did is she drew a line between the XRP tokens that were sold by Ripple Labs directly to institutional investors. In that case, Ripple got the money from the investors, and the judge said that is traditionally like a security, that's almost like selling a stock because when an investor purchases the token.
Under those circumstances, Ripple used the money to further develop the Ripple ecosystem to help banks and other financial institutions to start adopting the XRP token. And in contrast, Judge Torres said that those sales that occurred on exchanges where buyers did not know who the sellers were and also had no expectation that the money that they were using to purchase XRP would in any way be used to
help further development of the Ripple network and ecosystem. Those were not securities, and those are more akin to currencies or other sorts of things like bitcoin and not securities that were subject SEC regulation.
Is the SEC going to appeal this or are there risks for an appeal?
I think that there's a high chance that the SEC is going to appeal this decision. This is just one district court's ruling, and so far, the SEC has been very successful in its enforcement actions against cryptocurrency companies, and this decision in the Ripple case is a very notable blow and probably the first major defeat the SEC has
suffered in court in its efforts to regulate cryptocurrency. There's low risk for the SEC that the appellate court would either expand the ruling or engage in any sort of reasoning that could help other cryptocurrencies. So I think, in light of the procedural posture and the reasoning that the trial court judge gave for her decision, that there would be a good chance the SEC would see appellate court review of the decision.
The Second Circuit affirms the judge's decision, then that's binding on federal courts in New York, Connecticut, and Vermont.
Yes, that's correct. If the Second Circuit affirms the District
Court's decision, then we have binding precedent. And the fact that it's in the Second Circuit would also be very critical for the crypto industry because Number one, many cases are brought up in the Southern District of New York, which covers Manhattan, which is the center of the financial industry in the United States, and as a result, the Second Circuit has a lot of weight when it comes to its decisions in this space and many other circuit
courts outside of New York and Connecticut and Vermont. Also, we'll look to the Second circuits reasoning and decisions and help them inform their own decisions with respect to how securities laws could develop and whether or not they are the appropriate vehicle to regulate cryptocurrencies.
Is there another avenue for the sec besides pursuing an appeal?
The SEC could turn its attention to try to maybe create draft legislation or lobbying Congress to come out with a new set of rules that are specifically applicable to
the crypto industry. We've seen other jurisdictions in other countries and particularly the EU recently, where many countries have come together to come up with a framework that's specifically designed to regulate cryptocurrencies and digital tokens like XRP and these schemes include licensing, inspection, and what companies can can't do, and really a lot of what the crypto industry is asking the SEC to do is just to set out what the rules of the road are so that people
can know where the lines are. Just having some firm rules will help investors come into the industry and help with early adoption of a lot of these technologies. The industry argues that the way things are now with the SEC just picking and choosing which cases to bring and just bringing enforcement cases against companies and their senior executives, is really no way to run a new and merging industry.
As you mentioned, the SEC has filed lawsuits against Coinbase and Binance, two of the world's largest crypto platforms, for failing to register as securities exchanges. How does the Ripple decision affect those cases.
The Ripple decision is going to be very helpful for the defendants in those cases to push back against the SEC's narrative and against the SEC's theory of the case Ripple one on the argument that exchange sales of cryptocurrencies and digital tokens of XRP at least were not securities because the investors in those transactions had no expectation that that money was going to be ultimately sent to the company or used to further develop the platform. Is really
just speculation. So Coinbase and bittrix will have exactly the same arguments that as exchanges they are just helping to facilitate these sort of aftermarket transactions, and the court in the Ripples case held that those were not securities and
therefore not subject to either registration at the SEC. And once it's determined that those types of digital tokens are not securities, companies like coinbase and pittricks have no obligation to register with the SEC as exchanges because that obligation merely flows from the type of instruments to trades, and if they're not securities, they don't need to register securities exchanges.
Does the SEC have to argue that the judge in Ripple was wrong, Yes.
That's exactly right. But the SEC is going to have to argue that the judge and the Ripple case got it wrong, and that that decision is not finding precedent for other cases and be fair too, a lot of the determination regarding whether a particular instrument is a security or not
are very fact specific. That's why the Ripple case had to wait until after discovery was concluded so that a record could be developed that looks at, particularly how these instruments are marketed to people, what proceeds are used for, and what sort of communications are sent out the marketplace. And that's the determinative factor and something that the judge and the Ripple case spent a lot of time analyzing in her decision. Where those types of very factually nuanced type of elements.
So was this Ripple case the first major setback for the SEC in its decade of trying to enforce against the cryptocurrency industry.
Yes.
The reason that the Ripple decision is so important and so noteworthy is that it really was the first major setback that the SEC has suffered in terms of its enforcement actions against cryptocurrencies. And even more importantly the nature of this setback is crucial because the judge held that the XRP token is not a security, So this really goes to the fundamental arguments that the SEC is making in many other cases just to assert their jurisdiction over
this market. And Ripple, of course, is one of the most popular digital tokens. It's very well known in the market. The SEC's complaint alleges that over a billion dollars worth of XRP was sold over the years. So it's a very very significant decision just due to the fact that Ripple and XRP are such key players in the industry.
But also it's noteworthy because the judge really knocked the footing out from the SEC in terms of the fundamental question of whether the SEC even has any sort of jurisdiction over these types of virtual tokens and digital assets.
We'll have to wait and see whether the SEC actually does appeal. It's a pleasure to have you on, Bob. Thanks so much. That's Robert him, our partner at Tartar,
Krinsky and Drogan. FTC chair Lena Kahn's aggressive agenda to beef up anti trust enforcement has suffered one setback after another, the latest a major defeat when a judge rejected the agency's efforts to block Microsoft's seventy five billion dollar acquisition of activision Blizzard, and then con had to endure hours of criticism and ridicule, along with a few questions from Republicans on the House Judiciary Committee last Thursday, questions like
this from Republican Representative Kevin Kylie about the FTC's zero to four record in merger challenges. We fight hard when we believe that there is a law violation, and unfortunately things don't always go our way, but we make determinations.
Or are you bringing cases that you expect to lose? You repeat, are you bringing cases that you expect to lose?
Absolutely not joining me, is Anthony Sabino, Professor of Law at the Peter Tobin College of Business at Saint John's University. How big a blame bo was this Microsoft activision decision to Lena Khan's agenda.
Well, it's certainly a setback, but it's only one case out of many, but certainly gives a moment of pause where she probably should be reconsidering her position again. One of the reasons that Judge Jennifer Scott Corleyott in California rejected the preliminary injunction was that she believed that the FTC did not make a strong enough showing on the facts that they would ultimately prevail with respect to blocking
the merger. So what it says to the FTC going forward is that they should really pick their battles like anything else in life June, they should pick the battles that they're going to have and be more sure of themselves going forward. A litigate first, think about it later,
and no compromise whatsoever is not a winning strategy. And again this is something for the Commission to consider with regard to doing more to making a compromise with the parties as opposed to going to court and only to court.
So her theory, I believe is that even with losses in court, you would gradually reform the theories of antitrust and also you would send a strong signal that you know the agency is becoming a tougher sheriff.
I disagree with the first and only slightly agree with the second, as follows number one, A loss is a loss is a loss, and it does not necessarily change the law. And again, while it sets forth a position, the bottom line is that if you don't prevail, well you've lost. You have not prevailed, So that's not going to change the law. At all with respect to the other intention of the current FTC chair is the fact
that again she wants to show strength. But strength is demonstrated to you not only by going to court and litigating. It also can be demonstrated across the conference room table is seeking compromise with the parties to any particular for post transaction. And you can be strong in the ward room, you can be strong in settlement talks and so forth and reach a negotiated compromise, and in doing so you set a workable precedence going forward for all other cases.
Because everyone it's a small, relatively small community, both legal, both in terms of the legal and business community, and everybody knows what the other side is doing. So again that awareness of being the tough cop out there is satisfied just as well. And again there's a difference, I think between being a tough cop and again being forgive me don't know, disrespect intended, but being a bit full of bluster and losing anyway.
So do you know how were there any negotiations with the Microsoft over activision Blizzard?
No, I can't speak to that. I'm not aware if there were in negotiations there certainly was tremendous amounts of discovery, both before Judge Corley in the District Court and also before the FTC Administrative Judge, who I believe is going to start hearing the FTC administrative action in early August.
Because Judge Corley makes a strong mention of the fact that there were dozens and dozens of people in both cases deposed and literally millions of pages of exhibits, and so you know that tells you that there was certainly
a lot of activity here. But again it speaks to the point that if you're going to spend all this time doing discovery, well you must have something to talk about in terms of negotiation, because the whole purpose of discovery, among other things, is to demonstrate the relative strength and
strengths and weaknesses of each side. So having been so well informed, again, one can help the things that after deposing all these witnesses, all these experts, viewing millions of pages of documents, each side is not very cognizant of what the other side has in terms of their strengths and weaknesses. So therefore, sit down and talk.
So but do you think that the US and particularly the FTC has not been tough enough in antitrust matters. I mean, and if you look at the European Union, they seem to be.
Much tougher, right, And I think before I address that is the fact that one cannot really rely upon the European model, and with all due respect to our cousins across the ocean, is the fact that traditionally the European enter trust model has always been one where they safeguard competitors, as opposed to the distinct American model, which is where we protect competition, in other words, protect the competitive process. And again I think that's just a reflection of history.
That's why they're the old world. In the new world. You have many businesses in Europe that are entrenched, important parts of the local economy and in years past partly owned by state governments, are otherwise supported for whatever reason. In America, with our tradition of free enterprise and during certain points in our history laisse fair economics, the bottom
line is we're more worried about protecting competition. When the Landmark Standard Oil case was brought and the old Standard old monopoly is broken up, it wasn't to protect specific competitors of John D. Rockefeller Senior. It was done to protect the competitive process in the petroleum market. As far as being tough, again I reiterate, you can be tough in corporate you can also be tough with the negotiating table. And that varies because it is very much where I
should say, at least important to influenced by politics. And again, American history is shown that a Republican administration traditionally is a little more laissez fair, a little more open to mergers and acquisitions, whereas a democratic administration is usually a little less pro business and a little more against mergers and so forth. But again that's a political choice based
upon who the American people put it into office. Okay, and you can still have so we call it a skeptical view towards mergers and acquisitions, but it doesn't mean that that takes shape by going to court for every single case that comes along and refusing to or at least not pursuing thoughtfully negotiations with the relevant parties.
Do you think that the Justice Department has done better? I mean, I look at they pushed the envelope with that random House Penguin merger.
Yeah, I think the Justice Department is doing what they usually do and again it's interesting to see the byplay because again not to split hairs, but the role of the Anti Trust division of the DOJ is again to prosecute and enforce the anti trust laws, whereas the FTC's bailiwick is more their primary motivations more to protect competition
for the purpose of protecting the consumer. And with respect to the DOJ, I think they've been somewhat more thoughtful in the cases they've brought, the Penguin Press Day the
publishing case being one example. But again that's one of the other points here where one would like to see a little more shall we call it efficiency between these two components of the executive branch, to be better coordinated in that respect and maybe balance each other and again find a motive of venting as to what cases they bring. Shortantly is disposed to separately.
She was before Congress last week, and Republicans at the hearing ridiculed her many times. I mean, was that appropriate?
Well, I don't think it's appropriate for any American in public office or private citience to be ridiculed by Congress. But again, what is appropriate is for Congress to questions exercise oversight because the FTC is an executive agency and its job is to enforce the laws. And who makes those laws Congress, and who also has the power of
the purse, and that is likewise Congress. And again, one of the points that's been raised by some others and to a lesser extent myself, I have to be honest, is that was it really was for the FTC to go so gung ho on the Microsoft Slash Activision Blizzard merger and oppose it and spend a lot of taxpayer dollars of fighting that when again, the same results are a similar result that still enforces the law still shows itself on me, still shows rigorous enforcement, aniti trust law
is still good for the American public for the consumer. Could have been done. The same result could have been reached by negotiating deals with Microsoft, for example. Okay, was it necessary. In One of the things the court case bood and again Judge Curley made quite a big deal about this is the fact that the CEO of Microsoft took the stand and underwead said he promised to uphold sales of call of duty to sowning Nintendo and other competing platforms, which was a major concern of the FTC.
Did you need to go to court and spend taxpayer dollars to extract the concession from the CEO of Microsoft, not to mention also the CEO of Activision Blizzards on the other side of the merger. Or could that have been done across the conference room table at far less costs and then be reduced to a stipulation? Okay? I think the latter is far more cost efficient and beneficial to the taxpayer than the former approach.
Do you think that these FDC losses embold and companies to go forward with mergers or acquisitions they might not have.
No, I really don't think they do. I don't think it emboldens anyone. I think what the companies do is say, look, what's good the first point of course, and this is part of the joy of speaking to your particular audiences. These are business people, okay, These are person's in business. So they're going to make a dollars and cents analysis as to what's good for their business with respect to their due diligence as to well, how will the dog react to this, how will FTC react to this? Okay?
What are our obligations on the law? For example, the Partscott Reginal Act for pre mergering notification. Okay, that is just part of the calculus with respect to a course of doing business. So I don't think it emboldens anyone, but in a way it makes potential merger partners better prepared to say, Okay, well, you know what, we may have a fight with the FTC over this, so we're
just going to be better prepared. And again that's something that from the government's side, is something to because if business is more on the alert for aggressive or some might even venture over aggressive enforcement by the FTC, then the constituent parties to the merger can conford and say, look, we know you're not gonna like this, okay, but we're prepared to make this concession, that concession, etc. And put
things on the table. And that's really where the FTC or and even DOJ has to take a step back, in my humble opinion, say okay, fine, instead of running to court and again going through discovery and spending tax payer money on this, why don't we sit down in a conference room somewhere convenient and let's hash this out and let's see if there's a deal to be made.
I mean, that was really the ten or of mergers of the past Exon Mobil in the nineties, the various airlines over the years, where for example, in the in the oil industry, Exon Mobil is a great example. All right, DOJFTC said, look, okay, you can't have an intersection the usual four corners, all right, with an Exon station on one corner and mobile on the other. So what an exime moe we'll do? They stay, fine, okay, we'll identify them or you identify them for us, and we'll sell
one of those stations. So that way it forces competition, okay, because there's other oil companies out there and so forth. And that's why it was done. Airlines when they merge June okay. Typically what they do is the FTC or DOJ comes in again and says, look, you're going to dominate a particular airport whatever, And so they say, okay, listen, we're willing to sell our landing slots, our gate rights and so forth to a competing airline. So let's do
a deal. And that's how it's done. It's done by negotiation, it's done by stipulation. Okay. But the key factor, the key distinction June is that it's not done in a court of law, okay, And it's simply more efficient. It's just smarter and better for everybody. And again you still reach the same bottom line that everyone wants and what the law demands, which is you're protecting consumer choice.
Do you think it's time for Congress to pass an antitrust statute?
No, not at all. Okay, I for one, and very content with the anti trustler that we have. It's been around for well over one hundred years. It works well. Now certainly reasonable people can disagree, but the bottom line is the law is just fine, and enforcement I think is just fine. And again that varies with the political wins.
But the bottom line is the law is there. And again, when there have been situations where it can be demonstrated in the court of law okay, or prior to that, in the process of negotiation that a particular merger is not going to fly, then for that reason, those mergers fail, okay.
But mergers that are proposed and then how shall I say this, are modified massage by the negotiation process they go through, and they prove to be beneficial in the long run for everyone concerned, for the American public.
So how long do you think Lena Khan has before people start calling her tenure a failure.
That's up to Congress, and that's up to the chief executive because once again she's the head of an executive agency. And again I don't recall what her tenure protection is, if at all. But the bottom line is her boss is President Biden. And guess what who's his boss the American people. So if the American people tell President Biden she's got to go okay, then he should listen. But again I'm going to leave that to the great American people out there to let their approval or displeasure be known.
Thanks for being on the show, Anthony. That's Anthony Sabino, Professor of Law at the Peter Tobin College of Business at Saint John's University. And that's it for this edition of The Bloomberg Law Show. Remember you can always get the latest legal news on our Bloomberg Law Podcast. You can find them on Apple Podcasts, Spotify, and at www dot Bloomberg dot com, slash podcast Slash Law, and remember to tune into The Bloomberg Law Show every weeknight at
ten pm Wall Street Time. I'm June Grosso and you're listening to Bloomberg