Ripple Labs Inc. has scored a major legal win as a US judge ruled that the company did not violate federal securities law by selling its XRP token on public exchanges. This ruling is significant for the cryptocurrency industry and could provide support for other crypto firms currently battling the US Securities and Exchange Commission (SEC) over regulatory jurisdiction. The decision, however, did find that Ripple violated federal securities law by selling XRP directly to sophisticated investors. The SEC is currently reviewing the ruling, and Coinbase, the largest US crypto exchange, has announced that it will relist XRP on its platform.
The judge’s ruling is a landmark victory for Ripple and the wider cryptocurrency industry. The SEC had accused Ripple and its executives of conducting an unregistered securities offering by selling XRP. The case is important as it addresses the SEC’s assertion that the majority of crypto tokens are securities and subject to its investor protection rules. While the SEC has brought numerous enforcement actions claiming various tokens are securities, most have ended in settlements. In the few cases that have gone to court, judges have generally agreed with the SEC that the crypto assets in question are securities and, unlike commodities, must be registered with the SEC by their issuer and require detailed disclosures to inform investors of potential risks.
However, in this ruling, US District Judge Analisa Torres found that Ripple’s XRP sales on public cryptocurrency exchanges were not offers of securities, as purchasers did not expect profits tied to Ripple’s efforts. The judge stated that these sales were “blind bid/ask transactions” where buyers could not have known if their payments went to Ripple or any other seller of XRP. The ruling applied a Supreme Court case that classified an investment as an investment contract wherein money is invested in a common enterprise with profits coming solely from the efforts of others. In the case of Ripple, Judge Torres determined that XRP sales on cryptocurrency platforms and other distributions did not involve securities.
While the ruling represented a major victory for Ripple, it granted a partial win for the SEC. Judge Torres concluded that Ripple’s $728.9 million in XRP sales to hedge funds and other sophisticated buyers constituted unregistered sales of securities. She ruled that Ripple’s marketing to institutional investors demonstrated that the company was pitching a speculative value proposition for XRP, which relied on Ripple’s efforts to develop the underlying blockchain infrastructure. As a result, a jury will decide whether Ripple CEO Brad Garlinghouse, co-founder Chris Larsen, and other defendants aided the company in violating securities laws. Additionally, the defendants cannot argue at trial that they lacked “fair notice” that XRP was a cryptocurrency. The judge clarified that the law does not require the SEC to provide warnings to potential violators at an individual or industry level.
The ruling is expected to have broader implications for the crypto industry. It is likely to provide ammunition for other crypto firms facing SEC cases regarding the regulatory status of their products. The decision offers support for the argument that certain tokens, such as XRP, should not be classified as securities. The case has brought renewed calls for Congress to establish clear rules specifically addressing the classification and regulation of digital assets.
The SEC has stated that it is reviewing the decision, and it remains to be seen whether they will appeal once a final judgment is issued. Meanwhile, Coinbase, the largest US crypto exchange, is prepared to relist XRP on its platform. Coinbase’s chief legal officer, Paul Grewal, said the company had read the judge’s decision and reviewed its analysis, concluding that it was time to resume XRP trading. Following the announcement, Coinbase’s stock closed up by 24 percent on the day of the ruling.
In conclusion, the ruling in favor of Ripple Labs and the subsequent relisting of XRP by Coinbase are significant developments in the cryptocurrency industry. This decision may provide clarity regarding the regulatory status of certain tokens and could have implications for other crypto firms currently engaged in legal battles with the SEC. The case underscores the need for clear legislation that defines the rules for digital assets and provides guidance for issuers and investors alike.
