On July 13th local time, US federal judge Analisa Torres ruled that Ripple Labs Inc. did not violate federal securities laws by selling XRP tokens through public exchanges and through algorithms. This is the first favorable ruling for Ripple by a US judge and may set a precedent for future token classification cases, sending the crypto community into a frenzy.
XRP tokens also skyrocketed, with data from Blocking Terminal showing that XRP surged nearly 80% to $0.81, hitting a new high in over a year. Various tokens, such as Solana (SOL), Polygon (MATIC), and Cardano (ADA), which were previously viewed as securities by the SEC, rose 15% after the news.
Coinbase had previously delisted XRP from its trading platform and announced on Thursday afternoon that it would allow trading of the asset again. Another US exchange, Gemini, said it is “exploring listing XRP for spot and derivatives trading.”
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Ripple founder Garlinghouse celebrated the outcome on Twitter, writing: “Thanks to all who helped us get to this point — this is for every innovator in the US who is pushing boundaries and making positive progress. More to come!”
The complex ruling: is XRP a security?
Blocking previously reported that on December 22, 2020, the SEC formally filed a lawsuit against Ripple and its founders Brad Garlinghouse and Christian A. Larsen. The filing stated that since 2013, Ripple and its founders have sold more than 14.6 billion units of digital asset securities “XRP” in exchange for over $1.38 billion in funds, and that the defendants did not register their quotes and sales of XRP and did not obtain any registration exemptions, violating federal securities laws’ registration requirements.
The new ruling does not represent a complete victory for Ripple, as the judge also made a ruling favorable to the US Securities and Exchange Commission (SEC).
Analisa Torres ruled that Ripple’s direct sale of $728.9 million in XRP to institutional investors constituted unregistered sales of securities, violating federal securities laws. The ruling stated: “Upon consideration of the economic reality of the transactions and the totality of the circumstances, the Court concludes that Defendants sold XRP to the general public, including both domestic and international purchasers, as part of an ongoing offer and sale of securities without first registering their offers and sales of XRP with the SEC in violation of Section 5 of the Securities Act.”
Stephen Blockinglley, a partner at law firm Brown Rudnick, argued in his article that the view that XRP is clearly not a security is incorrect.
The lawyer believes that this ruling can be analyzed in three parts based on the facts of XRP sales: institutional sales, sales through algorithms, and “other allocations” such as employee compensation.
When it comes to “Ripple’s sales of XRP to sophisticated individual and institutional purchasers,” the court sided with the SEC, calling these securities transactions that constitute investments. However, when it comes to sales made programmatically or through algorithmic trading and other forms of distribution, Ripple won.
Blockinglley emphasized another important issue: whether cryptocurrency exchanges like Coinbase need to register as securities exchanges themselves. The SEC has stated clearly that most crypto assets traded should be considered securities. However, Blockinglley notes that the court did not reach a conclusion on this matter, which is another (implicit) victory for Ripple.
Chris Martin, head of research at Amberdata, said in a CNBC interview: “Today’s ruling is a big step forward for the industry. By determining that the sale of XRP on exchanges is not a security, we are beginning to understand what constitutes a security and what constitutes a commodity – and the SEC will have to revise its strategy in several ongoing cases, and I expect this ruling to apply to several other tokens as non-securities.”
Martin added: “Ripple’s institutional sales of XRP also have a huge impact on the industry, and some ICOs may now be in the spotlight. It is unclear how this ruling will affect exchanges caught up in SEC litigation, most of which only participate in secondary sales. But as we saw from the price today, the market is very optimistic about this ruling.”
SEC Response
The SEC has responded to the court’s ruling. The SEC told Fox News that it is satisfied with some of the rulings, but is still weighing the court’s final decision.
The SEC’s response states: “The Court held that Ripple’s sales of XRP into the secondary market were not securities transactions under the federal securities laws. We are pleased that the Court agreed with the SEC’s position that the Howey test is the appropriate test for determining whether a transaction involving a digital asset is an investment contract and concluded that Ripple’s XRP constitutes an investment contract under the Howey test. The Court also rejected Ripple’s fair notice defense, finding that the Howey test is well-established and that the claim of ignorance cannot stand as a defense to a violation of the securities laws. We will continue to review the Court’s decision.”
Consensys lawyer Bill Hughes predicted in his tweet that the SEC is likely to appeal to the Second Circuit Court. He said: “SEC’s enforcement strategy has been severely hit, and the pseudo-legislation made by SEC through over-broad rulemaking has been severely damaged. The credibility of SEC Chairman in the government and Congress is at an all-time low.”
Some cases are still pending. Regarding the SEC’s accusations that Garlinghouse and Larsen assisted and instigated Ripple’s illegal behavior, including selling products to institutional investors, the judge refused to make a ruling on this part of the case, which means that unless the two parties reach a settlement or the SEC gives up, the accusation will continue to be left to the jury for trial, and the specific trial date is undetermined.
Legislative calls
The Ripple case is far from over, and today’s ruling is the ruling of the first-instance court, some of which are likely to be appealed and overturned. But the ruling has sparked new calls, and the cryptocurrency industry is calling for legislation to provide clear rules for tokens, calling on Congress to clarify the status of digital assets.
Katten Muchin Rosenman lawyer Gary DeWaal said that this ruling may be helpful to Coinbase’s lawsuit, and he said that the market’s reaction shows that the result “is a major event for the industry” and also marks that Congress must legislate to determine standards for digital assets.
Tom Emmer, the Republican whip of the House majority, tweeted that the resolution shows that “tokens and investment contracts are separate and distinct, and may or may not belong to investment contracts. Now is the time for legislation.”
Author: BlockingBitpushNews Mary Liu
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