Statement Summary
In December 2020, the SEC sued Ripple Labs for selling unregistered crypto tokens, claiming they violated U.S. securities laws. A court ruled that Ripple’s institutional sales of XRP constituted illegal investment contracts but found other sales permissible. Ripple was ordered to pay over $125 million in penalties and was restrained from future violations. However, a recent settlement allows Ripple to reclaim over $75 million in escrow while vacating the injunction against it, which critics argue undermines the court’s authority and investor protections. Dissenting views from SEC officials express concern this settlement diminishes the agency’s enforcement capabilities and raises questions about future regulatory standards for cryptocurrencies. They argue the decision contradicts previous SEC positions and erodes investor confidence, fearing it could lead to a regulatory vacuum in crypto protections.
Original Statement
In December of 2020, under then-Chairman Jay Clayton, the SEC sued Ripple Labs, Inc. for failing to register its crypto tokens as required under the U.S. securities laws.[1] We alleged that Ripple and its leaders raised capital to finance their business through the sales of XRP in unregistered securities offerings, depriving investors of information material to their investments. On the parties’ cross-motions for summary judgment, the court found that Ripple’s institutional sales of XRP constituted an unregistered offer and sale of investment contracts in violation of Section 5 of the Securities Act of 1933, but that other secondary offers and sales did not. The court ordered that Ripple be permanently restrained and enjoined from future violations of Section 5 and ordered it to pay a civil penalty of over $125 million.[2] Both parties appealed the ruling.
Today, the Commission announced a settlement, which calls for the return to Ripple of over $75 million currently being held in escrow, and to vacate the court-issued injunction requiring Ripple to obey the law.[3] This settlement, alongside the programmatic disassembly of the SEC’s crypto enforcement program, does a tremendous disservice to the investing public and undermines the court’s role in interpreting our securities laws. This is not a settlement I can support.
Concerns Over the Settlement
First, the settlement undermines the court’s order. It razes the civil penalty ruling as well as the court-imposed injunction. The agreement states that neither the SEC nor Ripple will seek to vacate or amend any part of the district court’s summary judgement ruling. If, however, Ripple decides tomorrow to sell unregistered XRP tokens to institutional investors—in plain defiance of the court’s order[4]—this Commission will do absolutely nothing about it. There will be no enforcement of the law. The hundreds of hours spent by the court in this matter will be rendered meaningless. And the court’s decision will be effectively vacated.
Second, the settlement undermines the SEC and its enforcement program. It subverts the clear and honest application of the facts to the law, a cornerstone of any effective law enforcement program. This settlement is part of a broader, programmatic shift to dismiss our registration cases in the crypto context.[5] In remodeling our legal stance in this area, we have pointed to a new “regulatory path,” that the agency will purportedly pursue based on the work of the SEC’s Crypto Task Force.[6] But, even if the Crypto Task Force rewrites registration rules for crypto securities in the future, that does not somehow alter the rules that were in place at the time that Ripple violated them. Further, we have no hint of what those future rules might look like or how long it will take to put them in place—if ever. So, we are today accepting a diluted settlement, that erases the investor protections we already won, based on a non-existent framework that may or may not come to fruition potentially years from now, on the basis that the current framework in place—of applying the facts to the law—was not industry or innovation-friendly. This creates a regulatory vacuum with no end in sight. That does not an Enforcement program make.
In the meantime, the settlement joins a line of dismissals that collectively erode the credibility of our lawyers in court who are being asked to take legal positions today contrary to the ones taken just months ago. And it stands in defiant contravention of the doctrine of regularity of government affairs.[7]
Third, the settlement is not in the best interests of the investors and markets that our agency is tasked with serving and protecting. It creates more questions than answers. Does the resolution suggest to the market that we agree with the court’s ruling? What is the legal effect of the ruling in place? How can we ensure that investors get the information that they need and to which they are entitled under the law? At bottom, I have full confidence in the arguments our agency made to the Second Circuit on appeal, and equal confidence in the talent of SEC attorneys who advanced those arguments. That motivates my dissent today. Our agency is, I fear, worried that the appellate court would issue a sound ruling that agreed with the legal arguments already laid out by the Commission. That would undermine the agency’s new apparent mission of dismantling our crypto enforcement program and eroding investor protections. For these reasons, I cannot support our settlement. I urge the courts to take a long hard look at the Commission’s attempt to claw back the meritorious claims it previously made, and gut its own enforcement program from the inside out.
