Last month, LBRY, a cryptocurrency start-up, lost a lawsuit with the SEC after the court ruled that the company offered unregistered securities in the form of LBRY tokens.
The LBRY case is being closely watched as many believed it could set a legal precedent in the fledgling crypto space. Following the loss of LBRY, several individuals expressed skepticism about Ripple winning the SEC dispute.
Founder of CryptoLaw John Deaton shares his opinion about it. Before the loss of LBRY, Deaton predicted that some might argue that Ripple would suffer the same fate.
WILL RIPPLE LOSE BECAUSE @LBRYcom LOST?
I predicted two things would happen if LBRY lost: 1) The SEC would rush a decision to Judge Torres acting as if the Supreme Court had ruled; and 2) people would come out of the shadows and claim that Ripple & XRP will share the same fate.
— John E Deaton (@JohnEDeaton1) December 11, 2022
Deaton points out that the SEC did a decent job in its latest filing, which is in response to the summary judgment motions, as well as in its response to Ripple’s pre-1934 Blue Sky Laws argument. It’s true, according to Deaton, that Ripple doesn’t bear the “burden of proof,” but the SEC does.
He believes Ripple made a superior argument, stating that Ripple’s summary judgment motions were “appellate-ready briefs,” written for the 2nd Circuit and beyond.
According to him, “Ripple is hoping to win in the District Court, but is playing the long game,” meaning that the arguments were probably too strong at the District Court level.
Relatedly, Deaton offers an example of Ripple’s defense against the word “scheme” used by the Supreme Court in Howey, saying that it only applies after the court first finds that an underlying contract exists.
“I don’t believe that Judge Torres will agree with that argument. It would require her to believe that Judge Castel was wrong in Telegram, as well as several appellate courts,” Deaton said.
The CryptoLaw founder explains that Ripple’s best chance of winning is at the district court level with a “strict Howey analysis.”
The case of Ripple being brought in the second round adds its advantages compared to LBRY. Also, LBRY did not dispute the joint venture factor. On the other hand, in the case of Ripple, friends of the defendants and owners of XRP strongly contested this factor.
On the other hand, Deaton says the SEC must establish horizontal commonality to guarantee its victory in the litigation.
According to him, “horizontal joint ventures are established when the assets of investors are pooled, and the wealth of each investor is linked to the wealth of other investors as well as to the success of the entire company.”