(Bloomberg) -- A federal judge in New York split with another judge who earlier this month ruled that a Ripple Labs token was not a security when sold to the public on secondary markets, adding to uncertainty over cryptocurrency regulation.

US District Judge Jed Rakoff on Monday allowed the Securities and Exchange Commission to go forward with its case against Terraform Labs Pte and founder Do Kwon. In doing so, Rakoff said he rejected the distinction made in the Ripple case between public and institutional sales.

The July 13 Ripple ruling had been widely hailed as a victory for the crypto industry, and most coins soared in its immediate aftermath. Rakoff’s decision doesn’t disturb the Ripple ruling but shows that the question of when a digital asset is a security is far from settled. The confusion could bolster lawmakers’ arguments for new legislation to resolve the issue. 

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In court filings, the SEC had urged Rakoff not to follow US District Judge Analisa Torres’s reasoning in the Ripple case. The regulator has said it’s considering an appeal of the Ripple decision.

Torres, who sits one floor above Rakoff in the Manhattan federal courthouse, ruled that Ripple’s XRP token is a security when sold directly to institutional investors but not to the general public on exchanges.

“The court declines to draw a distinction between these coins based on their manner of sale, such that coins sold directly to institutional investors are considered securities and those sold through secondary market transactions to retail investors are not,” Rakoff said in the Terra decision. “In doing so, the court rejects the approach recently adopted by another judge of this district in a similar case.”

Security Test

The SEC had argued that the application of the so-called Howey test, named after a 1946 Supreme Court ruling, requires that XRP be considered a security. Under the test, an investment contract — which would be considered a security — exists if there’s an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”

Torres applied the test in finding institutional sales of the token fell under securities laws, saying that the crypto firm’s sales of its XRP token to sophisticated investors met the test for an investment contract because buyers “would have understood that Ripple was pitching a speculative value proposition for XRP with potential profits.”

But she said that sales of XRP to the general public didn’t fall under the test because there was no evidence that those purchasers expected to share in the company’s profits, noting that many of this type of sales were made through blind transactions made by trading algorithms on exchanges.

The SEC sued Terraform Labs and Kwon in February, alleging they offered and sold unregistered securities as part of a fraudulent scheme that wiped out at least $40 billion worth of market value. Kwon, who had evaded prosecution in South Korea before being arrested in Montenegro in March for traveling on a false passport, is also facing US criminal charges.

Read More: Do Kwon Arrest Has US, South Korea Jockeying Over Extradition

Rakoff said the SEC’s allegations against Terraform and Kwon applied to both institutional and retail investors. With both types of investors, the defendants were accused of touting the profitability of the tokens and claiming that proceeds from token sales would be placed back into the Terraform blockchain to generate further profits, the judge said. 

“Simply put, secondary-market purchasers had every bit as good a reason to believe that the defendants would take their capital contributions and use it to generate profits on their behalf,” Rakoff said. 

The case is Securities and Exchange Commission v. Terraform Labs Pte., 23-cv-01346, US District Court, Southern District of New York (Manhattan).

(Updates with details of ruling in third paragraph.)

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