SEC Chair Stumbles Over Crypto Definitions: Ripple CLO Reacts

• Ripple’s Chief Legal Officer, Stuart Alderoty, points out SEC Chair Gary Gensler’s struggle in defining what constitutes a security in the realm of cryptocurrencies during a congressional hearing.
• Rep. Ritchie Torres challenges Gensler’s broad interpretation of investment contracts, highlighting a potential legal hurdle for the SEC in crypto-related lawsuits.

Referring to a tweet by Stuart Alderoty, the Ripple CLO observed Gensler evasively navigating questions pitched by congress members, until Rep. Ritchie Torres confronted him with a well-versed understanding of the law combined with a dash of straightforward Bronx assertion.

A must watch. For hours Mr. Gensler smugly evaded question after question (even laughing about how rich he is) until Rep. Torres took him out with a command of the law and a touch of South Bronx street sense. Gensler didn’t know what hit him until it was too late. https://t.co/RzAK4inkHE

— Stuart Alderoty (@s_alderoty) September 28, 2023

Unpacking the ‘Investment Contract’ Conundrum

Amidst the hearing, Rep. Torres exhibited concern regarding the SEC’s stretched interpretation of an “investment contract“, a term seemingly molded to fit the agency’s narrative. Torres’s interrogations zeroed in on this interpretation, especially as it forms the basis for the SEC’s argument that a vast majority of cryptocurrencies fall under the banner of securities. Drawing upon the renowned Howey Test – frequently utilized by the SEC in crypto-related legal skirmishes such as those against Ripple and Coinbase – Torres delved into the intricacies of what truly constitutes an “investment contract” in the legal framework.

SEC’s Legal Ground Questioned by Scholarly Insight

In a profound examination, Rep. Torres also brought attention to a scholarly discourse in August, led by a cadre of law professors including a notable figure from Yale University. This discourse argued that no Supreme Court rulings have ever identified a scheme lacking a “contract” among parties as an “investment contract.” Gensler found himself on shaky grounds when queried on historical Supreme Court verdicts pertaining to investment contracts sans actual contractual agreements. His eventual sidestepping of the question, entrusting the interpretation to the “very fine attorneys of the SEC in the front of courts,” left a noticeable mark on the discourse, fueling further skepticism around the SEC’s stance on cryptocurrencies. On the flip side, Rep. Torres underscored Gensler’s hesitance as “baffling,” signifying a fundamental lapse in the bedrock principles the SEC employs in its crypto-centric legal pursuits.

With this legal quagmire, the crypto sector keenly watches on, as the repercussions of these discussions could echo through future courtroom halls where blockchain entities and the SEC lock horns.

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