Evolving legal and political landscape creates uncertainty about securities regulation of crypto-related activity

As 2024 comes to a close, the regulation of crypto-related activity continues to stand at the forefront of securities regulators’ enforcement priorities and objectives. Across Canada, provincial securities regulators commenced 15 enforcement proceedings, with enforcement objectives focusing on unregistered cryptoasset offerings, unregistered cryptoasset trading platforms and crypto-related fraudulent schemes.^[1] In the U.S., the Securities and Exchange Commission (SEC) continued to carry out an enforcement mandate with a heightened focus on the regulation of crypto-related activities. Of the $8.2 billion in civil penalties and disgorgement the SEC issued in 2024, approximately 56% is attributable to a monetary judgment obtained following the trial against Terraform Labs and Do Kwon, who were found liable for defrauding investors in cryptoasset securities.^[2] In October 2024, the SEC initiated an 800% surge in crypto-related enforcement proceedings.^[3]

While SEC Chair Gary Gensler has carried out a mandate focused on regulating crypto-related activity, some commentators have noted that the results of the recent U.S. presidential election may result in a downward trend in crypto-related enforcement proceedings. The incoming U.S. presidential administration announced that Paul Atkins will be nominated as the new SEC Chair following the departure of Gensler on January 20, 2025. Atkins has historically carried out a “pro-business” mandate to securities regulation, particularly with respect to his regulatory approach as an SEC Commissioner, and subsequently as an advisor and commentator responding to the 2008 financial crisis. In more recent years, Atkins has articulated a more crypto-friendly stance, which suggests that if he is confirmed by the Senate, the SEC’s focus on crypto-related enforcement may be reconsidered. 

Against this evolving political landscape, U.S. courts continue to grapple with the extent to which securities regulation applies to crypto-related activity. In our earlier blog post, we discussed the U.S. District Court’s summary judgment in Securities and Exchange Commission v. Ripple Labs, Inc., where the Court held that while Ripple Labs, Inc.’s (Ripple) XRP token was a security when it was sold directly to institutional investors (institutional sales), and thus subject to the oversight by the SEC in that context, the XRP was not considered a security when sold on a digital exchange or trading algorithm to retail investors (programmatic sales).

More recently, the U.S. District Court issued its final judgment on remedies. The Court held that based on its finding that the institutional sales constituted an unregistered offer and sale of investment contracts in contravention of section 5 of the U.S. Securities Act of 1933 (Securities Act), the Court ordered Ripple to pay a $125-million civil penalty — a significantly lower amount than the $876,308,712 penalty sought by the SEC. The Court also declined to order Ripple to pay disgorgement for the profits Ripple incurred from the institutional sales and prejudgment interest.

On October 2, 2024, SEC filed its notice of appeal to the U.S. Court of Appeals for the Second Circuit from the U.S. District Court’s final judgment. On October 10, 2024, Ripple filed its notice of cross-appeal.

The SEC v. Ripple Labs, Inc. saga remains unresolved

Although the U.S. District Court summary judgment was a case of divided success, it was met with considerable approval from the crypto community — in particular, the U.S. District Court’s ruling that the programmatic sales were not securities subject to SEC oversight because they could not be characterized as “investment contracts” under the three-part test set out by the U.S. Supreme Court in SEC v. W.J. Howey Co.^[4] Under Howey, an investment contract is a contract, transaction or scheme whereby a person (1) invests their money; (2) in a common enterprise; and (3) is led to expect profits solely from the efforts of the promoter or a third party.

The U.S. District Court found that the programmatic sales did not meet the third prong of the Howey test because purchasers did not have a reasonable expectation of profit to be derived by Ripple’s efforts, largely for the reason that the programmatic sales were “blind bid/ask transactions”; the purchasers did not know where their payments went, and “many [purchasers] were entirely unaware of Ripple’s existence.”^[5]

Conversely, the U.S. District Court held that the institutional sales were investment contracts under the Howey test. Unlike the programmatic sales, the Court found that the institutional sales met the third prong of the Howey test because an institutional purchaser would have purchased the XRP with the expectation that it would derive profits from Ripple’s efforts. The Court observed that representations made through Ripple’s communications and marketing would have led reasonable institutional investors to expect that Ripple would use the capital received from the institutional sales to improve the market for XRP, consequently increasing the value of the XRP.^[6]

In August 2023, the SEC brought a motion for interlocutory appeal with respect to the U.S. District Court’s finding that the programmatic sales were not investment contracts. The U.S. District Court denied this motion, ruling that an appeal on this issue could only be brought following the final judgment on remedies.

On August 7, 2024, the U.S. District Court issued its judgment on remedies. The SEC sought

1.  injunctive relief that would permanently enjoin Ripple from conducting unregistered offerings of XRP in institutional sales
2. an order that Ripple pay $876,308,712 in disgorgement and $198,150,940 in prejudgment interest
3. an order that Ripple pay an $876,308,712 civil penalty

Ripple argued that an injunction and disgorgement were unwarranted in this case, and that the civil penalty should not exceed $10 million.

The U.S. District Court granted injunctive relief, enjoining Ripple from future unregistered Institutional Sales, and ordered that Ripple pay a $125-million civil penalty for its contravention of section 5 of the Securities Act. The Court denied the SEC’s request for disgorgement and prejudgment interest on the basis that the SEC failed to demonstrate that institutional purchasers of the XRP suffered pecuniary harm.^[7]

The SEC has since filed its notice of appeal from the final judgment, and Ripple has filed its notice of cross-appeal.

U.S. court determinations on crypto-related activity referenced by the Capital Markets Tribunal

In Hogg (Re),^[8] the Ontario Capital Markets Tribunal (the Tribunal) considered whether the respondents’ unregistered sale and promotion of Unity Ingot tokens (the cryptoassets at issue in that case) constituted a contravention of Ontario securities laws.

The Tribunal rejected Staff’s submission that the tokens themselves constituted an investment contract, and instead expressly favoured the approach taken by the U.S. District Court in Ripple.^[9] The Tribunal held that the subject of a contract, transaction or scheme is not necessarily a security by virtue of being an investment contract; rather, an investment contract was the transaction or scheme for the offer and sale of the tokens, “including the economic reality of all the surrounding circumstances and, in particular, the representations made to investors…. Without those representations, there is no investment contract in this case.”^[10]

The Tribunal ultimately held that the respondents’ promotion and sale of the Unity Ingot tokens constituted an investment contract, considering the representations made to investors and the factors set out by the Supreme Court of Canada in its seminal decision, Pacific Coast Coin Exchange v. Ontario Securities Commission.^[11]

The Tribunal’s reference to the U.S. District Court’s analysis in Ripple suggests that the outcome of the SEC’s appeal, either affirming or reversing the U.S. District Court’s judgment, may have implications for the Tribunal’s decision-making in crypto-related cases moving forward.

With a new U.S. presidential administration, incoming change in SEC leadership and an anticipated shift away from crypto-related enforcement proceedings south of the border, the questions to be answered are whether and to what extent regulatory approaches taken in the U.S. will influence regulatory activity in Canada.

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[1] Canadian Securities Administrators 2023–2024 annual Year in Review [PDF]. This statistic refers to activity between July 1, 2023, and June 30, 2024.

[2] “SEC Announces Enforcement Results for Fiscal Year 2024”; “Statement on Jury’s verdict in Trial of Terraform Labs PTE Ltd. and Do Kwon”.

[3] Michael A. Mora, “‘Final Countdown’: SEC Launches Nearly 800% Litigation Surge in October”, New York Law Journal (November 13, 2024).

[4] (1946), 328 U.S. 293.

[5] 2023 US Dist LEXIS 120486 (SDNY July 13, 2023) at 4 and 24.

[6] 2023 US Dist LEXIS 120486 (SDNY July 13, 2023) at 19.

[7] The legal standard in Ontario to order disgorgement as sanction for a contravention of Ontario securities laws does not require Staff to establish pecuniary harm.

[8] 2024 ONCMT 15.

[9] See also the Capital Markets Tribunal’s recent decision in Nvest Canada Inc (Re), 2024 ONCMT 25, where the Tribunal rejected Staff’s submission that the cryptoassets at issue in that case were themselves investment contracts. The Tribunal accepted Staff’s alternative position following Hogg that the initial sale transactions of cryptoassets to purchasers constituted investment contracts, having regard to the application of the factors set out in Pacific Coast Coin Exchange v. Ontario Securities Commission, [1978] 2 SCR 112, to the circumstances of the case.

[10] 2024 ONCMT 15 at para. 106, citing 2023 US Dist LEXIS 120486 (SDNY July 13, 2023) at 22–24.

[11] [1978] 2 SCR 112.