CDC gives nod to Lummis-Gillibrand bill in proposed amicus brief in SEC v. Ripple case

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The Chamber of Digital Commerce (CDC) has requested to file an amicus brief in the case of the United States Securities and Exchange Commission v. Ripple Labs and its executives Bradley Garlinghouse and Chris Larsen. Liliya Tessler of the firm Sidley Austin filed a package of documents, including the proposed brief, with the U.S. District Court of the Southern District of New York on Wednesday.

The CDC is the world’s largest blockchain and digital asset trade group, with over 200 members that include industry players, investors and law firms. It argued that the Chamber does not have “a view on whether the offer and sale of XRP is a securities transaction,” but it is interested in “ensuring that the legal framework applied to digital assets underlying an investment contract is clear and consistent,” adding:

“Maintaining this distinction is critical to developing a predictable legal environment through a technology-neutral precedent, which this Court has the power to do.”

The documents later restate the question as “whether the well-settled law applicable to the offer and sale of an investment contract that is a securities transaction is properly distinguished from the law applicable to secondary transactions in digital assets that were previously the subject of an investment contract” in light of the fact that “no federal law (or regulation) specifically governs the legal characterization of digital assets recorded on a blockchain.”

The Chamber is wading into the Ripple v. SEC case.

Expect something similar to what it filed in the Telegram case and the argument is that although the SALE of XRP might have been as a security, the token is not inherently a security.

Similar to JDeaton, just not as compelling. https://t.co/D7m0kxKdp6

— Jeremy Hogan (@attorneyjeremy1) September 11, 2022

In the proposed amicus brief, the CDC acknowledges the “fact-intensive” Howey test, which:

“is at times difficult for even experienced lawyers to apply, let alone market participants without legal training.”

The CDC asked the court to reiterate the difference between contracts that are securities and the subjects of those contracts, which are not securities. The cases cited include a hodgepodge of subject items, as is already customary in these discussions. Here, cases involving whiskey casks, payphones, condominiums and beavers were mentioned.

The CDC continued its argument saying that the SEC has “commendably provided guidance on the application of securities laws,” but “the SEC’s enforcement approach, similarly based on Howey, paints a different picture” and the agency has failed to provide guidance to market participants who have requested it.

The CDC continues that the SEC is using in its case against Ripple a novel application of contract analysis of secondary transactions with assets subject to an investment contract, but has not provided guidance on how to apply that analysis. Nonetheless, the SEC still expects market participants to determine whether or not an asset is a security.

The CDC noted the lack of precedent on secondary transactions with the subjects of securities contracts but stated:

“The Chamber believes that, as long as the underlying asset does not include financial interests, such as legal rights to debt or equity, digital assets are presumed to be commodities.”

The CDC noted that the proposed Lummis-Gillibrand Responsible Financial Innovation Act (RFIA) took the same stance when it introduced the concept of “ancillary assets” into consideration. Furthermore:

“The Chamber respectfully asks that this Court draw upon the principles set forth in RFIA for guidance if it decides to clarify the characterization of digital assets, which are the subject of an investment contract or defer such a decision to the legislature.”