After three years of legal battles, Ripple has finally achieved a brief victory. Researchers 0xrc and Re from the Lunar Workshop have sorted out and interpreted the court ruling between the SEC and Ripple, including the SEC’s accusations, Ripple’s defense, the court’s analysis, and the impact of the verdict.
The court ruled that XRP is considered a security when sold to institutional investors, but not when sold in other situations. This ruling has significant implications for XRP and even the entire cryptocurrency industry. On one hand, Ripple may use the ruling to argue that XRP is not a security and should not be regulated by the SEC. On the other hand, the ruling may have broader implications for how the SEC regulates cryptocurrencies in the future. The ruling indicates that the SEC will need to carefully consider whether a particular cryptocurrency is more like a security or a commodity. It is worth noting that this ruling is only preliminary and not final, and may be subject to appeal.
The court discussed the SEC’s allegations against Ripple for selling unregistered XRP in three ways: 1) the court ruled that buying XRP as an institutional investor was to profit from Ripple’s efforts and development, and this type of investment was considered a security; 2) on the other hand, the nature of XRP tokens sold through exchanges is different. The court mentioned that while institutional investors may think that Ripple will use the funds raised through the sale of XRP to build the XRP ecosystem, retail investors who buy coins on an exchange may not think so. The court found that the issuance of XRP to retail investors was not considered a security; 3) regarding Ripple’s distribution of 690 million XRP through various other channels. The court found that this distribution of XRP did not meet the first part of the Howey Test: “investment of money.” The records showed that Ripple gave away XRP to employees and project parties for free, and never made any money from these distributions. Therefore, the court did not consider this part of XRP tokens to be a security.
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In addition, the court found that Larsen and Garlinghouse did not know who bought the XRP tokens sold on the exchange, and retail investors did not know the tokens they bought from Larsen and Garlinghouse. Therefore, the Howey Test did not apply in this case. Ripple also issued a “Fair Notice” defense, claiming that the SEC violated their due process. The court found that Ripple did not need Fair Notice from the SEC when selling XRP to institutional sellers, because the Howey test had already clearly demonstrated that the tokens sold in this situation were securities, and various past cases had demonstrated how to apply the Howey test to various real-world financial scenarios.