Cardano founder Charles Hoskinson reacts to the SEC appealing Ripple’s ruling, humorously suggesting that a Ripple Test could replace the longstanding Howey Test.
The SEC’s appeal notice filed in the Ripple lawsuit this week has continued to trigger reactions among top crypto stakeholders. Notably, the SEC filed an appeal notice on October 2, stating that it wishes to contest Judge Analisa Torres’ decision in the Ripple lawsuit.
Cardano Founder Reacts
As reported yesterday, Ripple’s CLO Stuart Alderoty expressed disappointment about the development. However, he emphasized that the company is prepared to prove that the SEC case is irrational and misguided in the U.S. Court of Appeals for the Second Circuit.
According to him, Ripple might file a cross-appeal, allowing the company to potentially overturn any unfavorable ruling from Judge Torres.
Reacting to Alderoty’s comment, Cardano founder jokingly asked Ripple CLO whether the company is ready to replace the Howey Test with a Ripple Test.
Howey Test Explained
The Howey Test originated from a 1946 Supreme Court case between the SEC and W.J. Howey Co. It has become a blueprint for determining whether a transaction constitutes an investment contract, a special type of security.
According to the Howey Test, a transaction must meet four criteria before it can be categorized as an investment contract. They include (investing money) in a (common enterprise) with the (expectation of making profits) directly from the (efforts of others).
The SEC leveraged the test to argue that Ripple violated federal laws by selling XRP as a security to investors. Interestingly, the district judge also applied the test to specific facts of the case.
Specifically, she found that Ripple’s programmatic sales and other distributions did not meet the third and fourth criteria of the Howey Test.
According to her ruling, retail investors were not relying on Ripple’s efforts to make profits from their XRP investments. Consequently, she ruled that these transactions do not constitute securities.
Ripple Test Could Emerge If SEC Loses Appeal
Despite Ripple winning the rulings on programmatic sales and other distributions of XRP, the verdict does not stand as a legal precedent. Some district courts have rejected the reasoning, as seen in the SEC lawsuit against TerraForm Labs.
The rejection stems from the fact that a district judge issued the Ripple decision, making it less of a legal precedent. Interestingly, the Ripple ruling could become a legal precedent if the Second Circuit affirms Judge Torres’ decision.
In this case, the SEC v. Ripple lawsuit could birth the “Ripple Test,” potentially determining the future classification of crypto assets. Consequently, Hoskinson humorously suggests that this Ripple Test could replace the longstanding Howey Test.
Meanwhile, there are speculations that the appeal could linger until early 2026 when the Second Circuit might issue its verdict.
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