Ripple Labs achieved a partial victory in the XRP lawsuit against the Securities and Exchange Commission (SEC) in the Southern District of New York on July 13th. Judge Analisa Torres ruled that XRP is not a security for programmatic sales but is classified as one for institutional investors.
As the SEC aimed to impose regulatory measures on several crypto companies, the recent triumph of Ripple and its XRP currency has encouraged investors, and the prices of XRP and other cryptocurrencies catapulted last week following the news.
However, both Ripple and the SEC could perceive this outcome as a potential victory, as it lends support to their respective arguments in the ongoing security classification debate. Future trials are also anticipated by various industry experts.
Latest Summary Judgment: SEC v.s. Ripple
This XRP lawsuit has been going on since December 2020 as the SEC filed a lawsuit against Ripple, its CEO Brad Garlinghouse, and its co-founder Chris Larsen, accusing the company of offering an unregistered security. The regulator alleged that Ripple had deliberately created an “information vacuum” (p.2) and selectively disclosed only the information it deemed essential.
From the latest summary judgment, the judge decided that XRP is NOT considered a security when Ripple puts XRP on exchanges for trading and when the company pays its employees with XRP.
However, while Ripple celebrates its partial victory, some ruling favors the SEC. The court upheld the SEC’s position regarding “Ripple’s Institutional Sales of XRP to sophisticated individuals and entities.” The judge ruled that Ripple’s $728.9 million worth of XRP sales to hedge funds and sophisticated buyers WERE unregistered sales of securities.
The SEC imposes stricter regulations compared to the Commodity Futures Trading Commission (CFTC). When a cryptocurrency is considered a security, failure to register the token with the SEC before listing it violates U.S. laws. The SEC has achieved significant wins in civil lawsuits against Block.one and Kik for conducting initial coin offerings (ICOs) to fundraise, resulting in alleged violations of securities laws in 2019 and 2020.
The classification of a financial asset as a security or commodity hinges on the Howey Test, which refers to the U.S. Supreme Court case (SEC v. Howey). The Test determines if a transaction qualifies as an “investment contract” under securities laws. According to the SEC, an “investment contract” exists when “an investment contract exists if there is an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”
In the Ripple v.s. SEC case, the judge thinks that the institutional investments in XRP should be considered a security as there is “a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others” (p.18). Ripple and its executives entice investors with the promise of improving the crypto ecosystem, thereby creating anticipation of returns through the purchase of XRP tokens.
Why Is the XRP Lawsuit Important for the Crypto Industry?
The case outcome may impact future crypto lawsuits
The outcome of the Ripple v.s. SEC case may set a precedent for similar lawsuits involving other crypto companies and the SEC. In a recent lawsuit involving Coinbase, the SEC categorized Polygon (MATIC), Solana (SOL), Cardano (ADA), and Stellar Lumens (XLM) as securities.
The SEC also launched investigations on Binance’s BNB token and the ApeCoin token of Bored Apes Yacht Club. Therefore, the court’s determination on whether XRP tokens are securities and fall under SEC oversight holds significant implications for companies, investors, and the entire industry.
Stellar, for example, provides technology for various prominent crypto entities, including Circle, Coinme, Abra, Anchorage, and Binance. If the SEC triumphs over Ripple in this case, it’s likely that the regulator would file a separate lawsuit against Stellar and its creators, which will have a market-wide impact on the entire crypto market.
Ripple is expected to bring TradFi into Web3
The XRP court case has garnered significant attention in crypto communities due to Ripple and XRP’s potential to facilitate the entry of traditional finance (TradFi) players into the crypto space. With a market cap of 33.87 billion euros, Ripple’s XRP is one of the world’s most valuable cryptocurrencies.
The company developed RippleNet, which utilizes blockchain technology to create a global payment network, aiming to provide faster, cheaper, and more efficient cross-border payments. Transactions that would last a few days before can now be settled within seconds.
With backing from notable entities like SBI Holdings, Banco Santander, and prominent venture capital firms such as Andreessen Horowitz, Ripple has reached a private valuation of $10 billion. The company and its XRP tokens play a vital role in bridging the gap between cryptocurrencies and TradFi.
Is It A True Win For Crypto?
The crypto industry is celebrating its victory against the SEC as the prices of various cryptocurrencies surge. Three major US crypto exchanges, Coinbase, Kraken, and Gemini decided to give XRP listing a second chance after the court ruling.
The market displays a bullish sentiment towards the XRP ruling, with industry professionals expressing optimism for the future. The distinction between securities and commodities gains clarity with the decision. Optimists believe that this decision is likely to prompt the SEC to reevaluate its approach in other ongoing cases, potentially categorizing additional tokens as non-securities. According to Bloomberg, many people believe that platforms like Coinbase may now face fewer concerns regarding public purchases.
However, as crypto market investors rejoiced following the ruling, some crypto experts have taken the contrarian stance. Antonio Juliano, the founder of dYdX, tweeted to advise investors to remain cautious of fraudulent “pump and dump” schemes prevalent in the market.
Christian Schultz, a former official at the SEC division of enforcement, stated that as the institutional sales of XRP were considered investment contracts by the judge, virtually all ICO might be classified as securities in the future.
What Will Happen Next?
Even though the New York Times states that the ruling of Thursday might complicate SEC’s case with Binance and Coinbase and “provide fodder for the crypto industry to defend itself in court,” the judges of those cases still “have to make separate determinations about whether the sale of those digital assets broke the law.”
Several experts also cautioned that the order on Thursday was just a partial summary judgment from a single district court judge. The conclusions and rationale of this decision are somewhat confined to the particular dispute at hand. It is important to note that judges within the same court, and even federal judges nationwide, disagree with or ignore this decision.
Palley and Preston Byrne, partners at Brown Rudnick, stated that the summary judgment is not the end of this lawsuit. The case can still be appealed or even reversed, and they expected a trial soon. It is thus crucial not to “yolo into anything based on that decision.” ConsenSys lawyer Bill Hughes also expected SEC to appeal immediately.
Consequently, the outcome of the XRP lawsuit has the potential to impact the regulatory landscape of the entire crypto industry, as an appeal opportunity exists that could lead to a revision of the decision.
EBC Insights on the XRP Lawsuit
It’s important to remember that this Ripple v.s. SEC lawsuit pertains specifically to the US. Regulations in different regions do not follow a global-encompassing, one-size-fits-all approach, as highlighted by Alex Strzesniewski, Founder & CEO of AngelBlock. Understanding compliance nuances is essential.
In Europe, the most important regulations are the Markets in Crypto Assets Regulation (MiCA) and the Digital Operational Resilience Act (DORA). EBC panelists have discussed its impact on the stablecoin industry. The European Union’s approach, as explained by Joachim Schewin from the European Commission, focuses on empowering decentralized initiatives from individuals, reflecting a distinct perspective from the US.
Several speakers at EBC expressed their desire to address the regulatory fragmentation across countries. Ernest Lima from XReg Consulting highlighted that MiCA can serve as a benchmark for other jurisdictions.
Michael Fasanello, Crypto Compliance Officer at AnChain.AI, stressed the significance of collaborative efforts to educate governments about blockchain technology’s benefits, preventing overreactions and hasty bans. Coty de Monteverde, Blockchain Center of Excellence Director at Banco Santander, also suggested that banks and service providers should collaborate in adapting to forthcoming regulations.
With the crypto space entering a new era of regulations, EBC gathers industry leaders, TradFi experts, and legal professionals to explore the future of crypto. With growing enthusiasm from TradFi and Web3 enthusiasts, the next EBC is a must-attend event for stakeholders, entrepreneurs, and developers alike!
