In 2020, the SEC sued Ripple for breaching U.S. securities laws by selling XRP without first registering it with the agency, according to SEC “Ripple Labs Inc. and two of its executives, who are also significant security holders, raised over $1.3 billion through an unregistered, ongoing digital asset securities offering.”
In a significant development of the ongoing legal dispute, Ripple Labs, the creator of the Ripple blockchain, and the Securities and Exchange Commission (SEC) engaged in a protracted court battle for three years. Recently, a federal judge delivered a pivotal verdict stating that the XRP token, part of Ripple’s network, was deemed a security during its sale to institutional investors several years ago. However, it did not hold the same classification when offered to the general public.
On Thursday, Judge Analisa Torres ruled that Ripple’s XRP token constituted an investment contract when it was sold to institutional investors. The case, initiated by the Securities and Exchange Commission (SEC), holds significant importance in determining the classification of tokens as securities. Although this ruling is an intermediate step in a broader legal proceeding, its implications are noteworthy.
Judge Analisa Torres concluded that Ripple’s sales of XRP totaling $728.9 million to institutional investors, including hedge funds, were unregistered securities offerings. However, programmatic sales and those conducted by Ripple’s CEOs were exempt from this classification. The remaining claims will be resolved through a jury trial.
Programmatic sales are those sales which were executed through cryptocurrency exchanges.
In the lawsuit, the SEC argued that Ripple failed to provide investors with adequate information for assessing the risks associated with their investment. Judge Torres based her determination on the Howey test, originating from a Supreme Court case in 1946. This test states that securities involve “an investment in a common enterprise with the expectation of profit solely through the efforts of others.” However, some members of the crypto community have criticized the Howey test as outdated and problematic.
W.J. Howey Co. considers an asset to be a security if it meets the following criteria:
- Money is invested.
- There is an anticipation of profits resulting from the investment.
- The investment is made in a shared endeavor.
- The profits are generated through the endeavors of a promoter or third party.
The primary rationale behind US District Judge Analisa Torres’ decision was that institutional investors, who were approached by Ripple during the relevant period, were more likely to possess knowledge of XRP’s resemblances to securities. In contrast, retail traders, commonly referred to as programmatic investors, who directly purchase XRP on cryptocurrency exchanges, may not have been equally informed. This aspect of the ruling provides both Ripple and the SEC with reasons to perceive it as a potential victory, as it adds weight to the ongoing debate regarding the security classification of XRP from both perspectives.
Essentially, the verdict carries both positive and negative implications, but the majority of the crypto community perceives it favorably. This inclination is likely because a significant portion of the community consists of retail investors who have invested in the non-security aspect of the ruling.
“A huge win today – as a matter of law – XRP is not a security. Also a matter of law – sales on exchanges are not securities. Sales by executives are not securities. Other XRP distributions – to developers, to charities, to employees are not securities.” – Stuart Alderoty, Chief Legal Officer, Ripple.
A huge win today – as a matter of law – XRP is not a security. Also a matter of law – sales on exchanges are not securities. Sales by executives are not securities. Other XRP distributions – to developers, to charities, to employees are not securities.
— Stuart Alderoty (@s_alderoty) July 13, 2023
“The judgments today are a huge step forward for the industry” Chris Martin, head of research at Amberdata, told CNBC.
On Thursday afternoon, Coinbase, which had previously removed XRP from its trading platform, announced via a tweet that it would now reinstate trading of the asset.
W.— Coinbase 🛡️ (@coinbase) July 13, 2023
W for @ripple.
W for the industry.
W for the builders.
W for a clear rulebook.
W for updating the system.
Oh, and XRP is now open for trading.
Gemini is also exploring the listing of XRP for both spot and derivatives trading.
Given today’s ruling that the sale of XRP on exchanges is not a security, @Gemini is exploring the listing of XRP for both spot and derivatives trading.
— Gemini (@Gemini) July 13, 2023
In the present crypto landscape, numerous prosperous cryptocurrency projects heavily depend on initial token sales to institutional investors and venture capitalists before their public launch, aiming to secure the necessary support to kick-start their initiatives. Often, these projects proactively register these fundraising endeavors with regulators to mitigate any potential consequences.
“VC dumping is a security. Programmatic token sales are not.” – Ryan Selkis, founder & CEO of Messari Crypto
VC dumping is a security.
Programmatic token sales are not.
Is that the gist?
— Ryan Selkis 🪳 (@twobitidiot) July 13, 2023
The Ripple case is still ongoing and will eventually proceed to trial at a later date. Therefore, despite the cryptocurrency market experiencing a surge in prices, there remain sufficient uncertainties that warrant concern within the sector.
XRP price started soaring just after the ruling and reached the height of $0.87. While writing this post XRP was trading at $.0.78 with the market cap of $41,064,964,597. It’s price is 146% up than the last year $0.33 according to coinmarketcap.
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