In a Feb. 26 hearing for a consolidated class action against Ripple Labs Inc., a California court has argued in its ruling that crypto currencies that are not securities may be subject to federal laws targeting unfair, deceptive, or abusive acts or practices (UDAAP).
During the hearing, the court affirmed that transactions involving cryptocurrencies that are not considered to be securities may be subject to UDAAP laws — paving the way for further putative action against other crypto projects that claim exemption from federal securities laws, especially in California.
However, the application of UDAAP laws is dynamic, since the legal community has not agreed on a universally accepted definition of “unfair” within this context.
UDAAP Laws May Apply to Crypto Project not Securities Issuance
The judge is considering whether Ripple might have violated California’s Unfair Competition Law (UCL) — which prohibits unlawful, unfair, or fraudulent business practices.
Ripple sought to have the claim dismissed on the grounds that the complainant failed to prove that his XRP tokens were purchased “as part of an initiation distribution” and that the complainant failed to prove that Ripple Labs qualified as a “seller” under relevant federal law.
The court ruled against Ripple, backing the complainant’s claim that Ripple Labs was acting as a seller in issuing XRP. The judge did not, however, endorse the complainant’s allegations of misrepresentation under the California Corporations Code. As such the plaintiffs were granted 28 days to file an amended complaint addressing the deficiency of their claims for misrepresentation.
After a 2004 ruling in Bowen v. Ziasun Technologies Inc. that determined UCL does not apply to securities transactions under the Federal Trade Commission Act, the discussion surrounding the application of California’s UDAAP law to securities has been dampened for over a decade.
Ramifications for Crypto Companies
The application of UDAAP laws to cryptofirms could result in projects going under fire for failing to adhere closely to all customer agreements submitted to users.
The failure to detail the business practices, fees and promotional materials of a project will open up cryptofirms to litigation under UDAAP laws. Companies seeking protection from UDAAP claims can begin to introduce arbitration agreements and waivers for class action into their terms of service.