Reporter Jessy Blocked
The case of the US SEC suing Ripple for violating securities laws for two and a half years will finally come to an end.
On July 13, a judge of the US Southern District of New York made a summary judgment on the SEC v. Ripple case. In the judge’s 34-page ruling, Ripple did not violate the law when XRP was sold on public exchanges. However, controversially, in the judge’s ruling, XRP was considered a security when it was raised in the primary market, but not a security when it was sold to the public in the secondary market.
Ripple’s Chief Legal Officer Stuart Alderoty said in an interview that the ruling represents a “victory for the broader cryptocurrency industry”.
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After the ruling came out, the highest increase in XRP price doubled directly, and the market value rose to fourth. Mainstream cryptocurrencies have also risen in response, especially some cryptocurrencies that were previously listed by the SEC as securities, such as Sol and Matic. Exchanges that were once delisted XRP trading pairs due to regulatory reasons also expressed the possibility of restarting XRP trading, such as Coinbase, which has clearly stated that it will restart trading, while Gemini stated that it will explore the relisting of XRP.
What does the Ripple ruling mean for the cryptocurrency industry?
The Long and Unreconciled Road
For many years, the US Securities and Exchange Commission has believed that digital assets constitute securities, just like stocks and bonds traded on Wall Street, and should be subject to the same strict regulation. Just last month, the US Securities and Exchange Commission also sued the two largest cryptocurrency exchanges in the United States, Coinbase and Binance, accusing them of marketing unregistered securities to the public.
The question of whether certain tokens are securities has been hanging over the cryptocurrency industry for years. Based on the US Supreme Court’s definition of an investment contract in 1946, if an investor purchases a cryptocurrency to provide funding for a company or project and intends to profit from these efforts, the cryptocurrency may fall within the SEC’s jurisdiction.
The SEC alleges that the tokens sold by Binance.US as securities include but are not limited to SOL, ADA, MATIC, FIL, ATOM, SAND, MANA, ALGO, AXS, and COTI. The indictment against Coinbase contains a total of 13 securities tokens: SOL, ADA, MATIC, FIL, SAND, AXS, CHZ, FLOW, ICP, NEAR, VGX, DASH, and NEXO.
In the past, the SEC has also accused several startups of violating securities laws by raising funds through the sale of cryptocurrencies, and most of them won civil lawsuits.
The case against Pipple dates back to December 2020, when the SEC sued Ripple, company CEO Brad Garlinghouse, and co-founder Chris Larsen, alleging that Ripple violated securities laws by selling XRP and raising more than $1.38 billion. At the time, the market value of XRP exceeded $20 billion, second only to Bitcoin and Ethereum.
As both the SEC and Ripple refused to settle, a lengthy legal dispute began. However, the lawsuit did not seem to have much impact on Ripple, except for a brief drop in the price of its cryptocurrency. At the end of 2022, Ripple announced its own EVM sidechain and will further integrate into the larger on-chain EVM ecosystem. XRP’s market value has also remained in the top ten.
However, Ripple has also been criticized by the industry for its founders constantly selling cryptocurrency. On the other hand, how useful is XRP in payments? According to the use cases published by XRP, XRP is a payment token primarily for bank and payment service providers, facilitating fast settlements between institutions. However, payments are the most basic function of cryptocurrencies, and the key is to connect offline B-side users and enable them to accept cryptocurrency for payment settlements.
What does the ending of this case mean for the cryptocurrency industry?
Behind the end of the case, the SEC’s attitude is highly significant.
The SEC responded to the court’s ruling that XRP is not a security last night: “We are satisfied with the court’s ruling that Ripple, in some cases, offered and sold XRP tokens in the form of investment contracts in violation of securities laws. The court agreed with the SEC’s view that the Howey test determines the securities analysis of cryptocurrency transactions, and rejected Ripple’s self-made test of what constitutes an investment contract, instead emphasizing that the Howey test and subsequent cases have ruled that various tangible and intangible assets can be the subject of investment contracts. In addition, the court rejected Ripple’s fair notice argument, stating that the Howey test is clear and that claiming ignorance cannot be a defense against securities law. We will continue to review the court’s decision.”
From the frequent lawsuits against the cryptocurrency industry, we can see that the SEC has been very strong in its assertion that cryptocurrencies are securities. And it is becoming more and more stringent. According to statistics, the SEC has now classified over $120 billion worth of cryptocurrencies as unregistered securities. SEC Chairman Gary Gensler has also made a strong statement to the media: “We don’t need more digital currencies. We already have digital currencies. They’re called the dollar, the euro, or the yen. They’re already digital.” And he has repeatedly issued warnings that cryptocurrency exchanges and the tokens traded on them may violate federal laws, and pointed out that most cryptocurrencies meet the criteria for securities, urging platforms to complete their registrations as soon as possible.
In March 2022, US President Biden signed an executive order on “Ensuring the Responsible Development of Digital Assets.” In September 2022, the White House released the world’s first comprehensive framework for the responsible development of digital assets, which includes consumer and investor protection, promoting financial stability, combating illegal financial crimes, strengthening US global financial system leadership and economic competitiveness, inclusive finance, responsible innovation, and exploring the US central bank digital currency (CBDC), aiming to protect US digital asset consumers, investors, and businesses, maintain financial stability, national security, and financial environment. This actually expresses the US attitude towards regulation in the cryptocurrency field from the highest level.
However, in specific judicial proceedings, it is not so easy for the SEC to win. Faced with judicial rulings, the SEC also expressed satisfaction with the court’s decision, which actually represents recognition of the judicial ruling. The judge in this ruling did find that the institution’s sales and fundraising activities constituted securities transactions. However, the programmatic sales on the trading platform did not meet the third prong of the Howey test. This means that selling to users through an exchange is permissible, as long as it is done through an order book and not through ICO/IEO/LaunchBlockingd, etc.
In other words, XRP sold on the secondary market is not a security, so cryptocurrencies sold through a trading platform are not securities either. US judges will follow past precedents to make rulings in cases. That is to say, in future similar cases, the Ripple case will serve as a reference for judges, which is undoubtedly a positive development for the cryptocurrency industry.
This is indeed a cause for celebration in the encryption industry. And analyzing Ripple and the SEC’s more than two-year legal dispute, we can clearly feel that in the long run, such regulation and prosecution are just the inevitable path for encryption compliance and embracing the mainstream.