On July 13th, local time, U.S. Federal Judge Analisa Torres ruled that Ripple Labs Inc. did not violate federal securities laws by publicly trading and selling XRP tokens through algorithms. This is the first favorable ruling for Ripple by a U.S. judge and may set a precedent for future token classification cases, causing a wave of excitement in the crypto community.
Following the ruling, the price of XRP soared. According to LianGuai terminal data, XRP surged nearly 80% to $0.81, reaching a new high in over a year. Tokens such as Solana (SOL), Polygon (MATIC), and Cardano (ADA), which were previously considered securities by the SEC, also rose 15% after the news broke.
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Coinbase had previously delisted XRP from its trading platform but announced on Thursday afternoon that it would allow trading of the asset once again. Another U.S. exchange, Gemini, stated that it is “exploring listing XRP for spot and derivatives trading.”
Ripple’s founder, Brad Garlinghouse, celebrated the outcome on Twitter, writing, “Thank you to all who helped make this decision today – it’s for all of the crypto innovators in the U.S. and beyond.”
A complex ruling: Is XRP a security or not?
As previously reported, on December 22, 2020, the SEC officially filed a lawsuit against Ripple and its founders Brad Garlinghouse and Christian A. Larsen. The complaint stated that since 2013, Ripple and its founders have sold over 14.6 billion units of the digital asset security “XRP” in exchange for over $1.38 billion in funds. The defendants did not register their offers and sales of XRP, nor did they obtain any registration exemptions, thereby violating the registration provisions of federal securities laws.
The new ruling does not represent a complete victory for Ripple, as the judge also made a ruling in favor of the U.S. Securities and Exchange Commission (SEC).
Analisa Torres ruled that Ripple’s direct sale of $728.9 million worth of XRP to institutional investors constituted an unregistered securities sale, in violation of federal securities laws. The ruling stated, “After considering the economic reality and overall scheme, the Court concludes that Ripple’s sales of XRP to institutional investors were offers and sales of investment contracts, subject to registration under Section 5 of the Securities Act.”
Stephen LianGuailley, a partner at the law firm Brown Rudnick, analyzed the ruling in an article and pointed out that the view that XRP is clearly not a security is incorrect.
The lawyer believes that the ruling can be divided into three parts, analyzing the facts surrounding the sale of XRP: institutional sales, algorithmic sales, and “other distributions,” such as employee compensation.
When it comes to “Ripple selling XRP to sophisticated individuals and entities,” the court sided with the SEC, stating that these transactions are securities trades and constitute investments. However, when it comes to sales conducted through algorithms or other distribution methods, Ripple emerged victorious.
LianGuailley emphasized another important issue: whether cryptocurrency exchanges like Coinbase need to register as securities exchanges. The SEC has made it clear that most transactions involving cryptographic assets should be treated as securities. However, LianGuailley stated that the court has not yet reached a conclusion on this matter, which is another (hidden) victory for Ripple.
Chris Martin, Director of Research at Amberdata, stated in an interview with CNBC, “Today’s ruling is a big step forward for the industry. By determining that the sale of XRP by exchanges is not a security, we are beginning to understand what constitutes a security and what constitutes a commodity. The SEC will have to modify their strategies in several ongoing cases, and I expect this ruling to apply to other tokens as well.”
Martin added, “Ripple’s determination that institutional sales of XRP constitute securities also has a significant impact on the industry, and some ICOs may now become the focus of attention. It is still unclear how this ruling will affect exchanges involved in SEC litigation, as most of them only participate in secondary sales. But as we can see from the price today, the market is very optimistic about this ruling.”
The SEC has responded to the court’s ruling. The SEC told Fox News that they are satisfied with parts of the ruling, but are still considering the court’s final decision.
The SEC’s response stated, “The court found that Ripple offered and sold XRP tokens in violation of the securities laws in certain circumstances as investment contracts. We are satisfied with this part of the ruling. The court agreed with the U.S. Securities and Exchange Commission’s (SEC) view that the Howey test can be used to analyze whether a cryptocurrency transaction is a security, and rejected Ripple’s self-test on what constitutes an investment contract, instead emphasizing that Howey 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, noting that the Howey test is clear and that ignorance is not a defense against violating securities laws. We will continue to weigh the court’s decision.”
Bill Hughes, a lawyer at ConsenSys, predicts in his tweet that the SEC is likely to appeal to the Second Circuit Court of Appeals. He said, “The SEC’s enforcement strategy has been severely undermined, and its pseudo-legislation through overly broad rulemaking has been seriously disrupted. The chairman of the SEC will have the lowest credibility in government and on Capitol Hill.”
Some cases are still pending, including the SEC’s charges against Garlinghouse and Larsen for aiding and abetting Ripple’s illegal activities, including the sale of products to institutional investors. The judge has refused to make a ruling on this part of the case, which means that unless the parties reach a settlement or the SEC drops the charges, this accusation will continue to be left to the jury for trial, and the specific trial date is yet to be determined.
The Ripple case is far from over. Today’s ruling is a ruling by the trial court, and some of these rulings are likely to be appealed and overturned. But the ruling has sparked new calls for legislation, with the cryptocurrency industry calling for clear rules for tokens and asking Congress to clarify the status of digital assets.
Gary DeWaal, a lawyer at Katten Muchin Rosenman, said that this ruling could help Coinbase’s lawsuit. He said that the market reaction indicates that the result “is a major event for the industry” and also signifies that Congress must establish standards for digital assets through legislation.
Tom Emmer, the House Majority Whip and a Republican, tweeted that this ruling shows that “tokens and investment contracts are separate and distinct, and it may or may not be an investment contract. It’s time for legislation now.”
Author: LianGuaiBitpushNews Mary Liu
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