SEC Faces Legal Challenge as Bitnomial Sues Over XRP Classification

Bitnomial Exchange, LLC filed a complaint on October 10 against the U.S. Securities and Exchange Commission (SEC) and its commissioners. The lawsuit contests the SEC’s classification of XRP as a security.

The lawsuit was filed in the United States District Court for the Northern District of Illinois, seeking declaratory and injunctive relief to prevent the SEC from exercising jurisdiction over digital asset futures. The exchange believes such actions from the regulatory body should be overseen solely by the Commodity Futures Trading Commission.

Bitnomial, a CFTC-approved designated contract market, came into focus after the SEC objected to its plans to list XRP futures. According to the complaint, “The SEC asserts jurisdiction over a product that is already regulated by and subject to the exclusive jurisdiction of the CFTC.” Bitnomial had filed a self-certification with the CFTC to list the futures contract, which was set to begin trading on or after August 13, 2024.

The lawsuit reveals that, after Bitnomial’s self-certification with the CFTC, the SEC contacted the company, claiming that listing XRP futures would breach federal securities laws. The SEC stated that XRP futures would be classified as security futures, bringing them under joint SEC and CFTC regulations. Furthermore, the SEC demanded that Bitnomial comply with additional SEC regulations, including registering as a national securities exchange (NSE) and submitting to SEC oversight.

Disputing the SEC’s Classification

Bitnomial strongly opposes the SEC’s position. The company points to the July 13, 2023, ruling by Judge Analisa Torres in the Southern District of New York, which rejected the SEC’s claim that XRP itself constitutes a security in secondary market transactions. Bitnomial argues that XRP does not match the conditions for an investment contract and hence should not be categorized as a security.

The company argues that complying with the SEC’s demands, such as registering as an NSE, would be overly burdensome and costly, effectively hindering its operations. Bitnomial’s legal counsel stressed the difficulties of meeting these regulatory standards, claiming that the SEC’s definition of XRP as a security is incorrect.

Despite its legal wins, XRP is down 13% year to date and has fallen steeply so far in October. Source: Brave New Coin XRP Liquid Index

In its lawsuit, Bitnomial asks the court to declare that XRP futures are not security futures and to prevent the SEC from asserting jurisdiction over the company or pursuing enforcement actions related to listing, trading, or selling XRP futures on its platform. “Bitnomial seeks this declaration before listing the contract, contrary to the SEC’s interpretation of the law, which would expose Bitnomial to SEC enforcement,” the complaint reads.

Broader Legal Context

This lawsuit follows the SEC’s filing of a motion on October 2 to appeal Judge Torres’ final ruling, although the SEC has yet to clarify the specifics of its appeal. Just a few days ago, on October 8, Crypto.com filed a complaint against the SEC after getting a Wells notice. Another important development was Canary Capital’s filing with the SEC on October 8 to launch a spot XRP exchange-traded fund (ETF), which came shortly after Bitwise’s filing.

Bitnomial’s lawsuit underscores the growing tension between the SEC and XRP-related firms as court skirmishes over the digital asset’s classification continue. Several industry executives have already rallied in support of Bitnomial and criticized the SEC for prohibiting derivatives exchanges from trading futures. According to popular attorney Bill Morgan, while the SEC presented paperwork asserting XRP as a security, it “did not note that the court rejected the SEC’s argument that all of the XRP sales at issue were investment contracts and found that the token itself was not a security”.

Another attorney, Fred Rispoli, described it as “next-level government corruption” and expressed dissatisfaction with the agency’s present leadership. Rispoli said that this action has killed his small hope that the SEC will reverse course, adding that significant reform is required for any future optimism.