Broader question: Given that SEC enforcement is speculative (eg: we think this might be a security) do they have to pay damages when they're wrong? If not, why? If so, how much?

That conclusion is an assumption of an assumption of an assumption.

First of all, SEC enforcement is both civil and regulatory. The SEC is an independent federal agency. Since it is not a member of a federal executive department it has no criminal enforcement capability. All matters of criminal conduct are forwarded to the Justice Department.

Secondly, SEC enforcement is not speculative. They can seize assets just the same as the Justice Department as a matter of regulatory enforcement and they do so regularly. SEC enforcement agents specialize in securities law which is a legal specialty.

Third, the law is unclear whether crypto, crypto exchanges, and transactions therein qualify as securities. If this activity were to become illegal tomorrow then that becomes a matter for the Justice Department to enforce, not the SEC.

Source: I have relations to a famous (in securities enforcement world) former SEC enforcer.

That makes as much sense as asking if a judge should pay damages if they are wrong. Define "wrong".

They're pretty careful to never be wrong.

The parent of the comment you’re replying to literally cites a case where they were deemed to be wrong.

It looks a bit more nuanced than that. Torres is the judge in the XRP case. From the article:

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Torres, who is based in New York, on Thursday said the company's $728.9 million of XRP sales to hedge funds and other sophisticated buyers amounted to unregistered sales of securities.

But Torres ruled that Ripple's XRP sales on public cryptocurrency exchanges were not offers of securities under the law, because purchasers did not have a reasonable expectation of profit tied to Ripple's efforts.

Those sales were "blind bid/ask transactions," she said, in which the buyers "could not have known if their payments of money went to Ripple, or any other seller of XRP."

——-

So it seems XRP was deemed a security just the sales on public exchanges weren’t a securities offering? A bit confusing IMO.

From reading over the decision, the judge emphasizes that a security is an investment contract. The institutional investors and Ripple formed a contract, in which the investors were promised that Ripple would do various things in exchange for the investment.

On the secondary markets, people were just speculating on the token price going up or down. They weren't getting any promises from Ripple, or even necessarily giving money to Ripple, so there was no contract. If there's no contract, there's no security. Just speculating on the price of something doesn't turn that thing into a security.

Thanks for the clarification.

I don’t think it’s clear from that case that XRP is not a security - “The SEC won a partial victory as Torres found the company's $728.9 million of XRP sales to hedge funds and other sophisticated buyers amounted to unregistered sales of securities.”

It seems more that selling it on exchanges was not a violation of the law, but some of the activities around it still were.

(Edit - in fact it may not even be that, according to a footnote - "The court does not address whether secondary market sales of XRP constitute offers and sales of investment contracts because that question is not properly before the court." - so it looks like ripple aren't in trouble for selling XRP on exchanges, but that doesn't necessarily mean the exchanges aren't in trouble for it)

Conclusion of section 2: "the Court concludes that Ripple’s Programmatic Sales of XRP did not constitute the offer and sale of investment contracts."

If it's not an investment contract, it's not a security. That's one of the major points of the whole decision. Section 1 details ways that sales to institutional buyers did involve a contract.

The footnote just says the decision does not directly address exchanges. But it's hard to see how the arguments in section 2 wouldn't apply to exchanges just as well.

Sure - The point is it’s not as simple as “w00t Ripple won it’s not a security”, as the conduct of exchanges with respect to the token was explicitly not examined.