Court ruling on XRP shakes the industry. Is it really a security? What will be the follow-up direction?

Author | Wu on blockchain

Wu learned that the Southern District Court of New York ruled that the SEC’s lawsuit against Ripple concluded that Ripple’s programmatic sales of XRP do not constitute an offer and sale of investment contracts; however, Ripple’s institutional sales of XRP constitute unregistered offers and sales of investment contracts in violation of Section 5 of the Securities Act.

According to Adam Cochran’s analysis, the judge did determine that institutional sales/fundraising are securities, but the programmatic sales of exchanges did not meet the third aspect of the Howey test, so selling to users through exchanges is permissible as long as it is through order books rather than methods like ICO/IEO/Launchpad; bounties, using XRP for investments in others, grants of XRP, and transfers to executives are not considered securities.

Most importantly, the court emphasized that the tokens themselves are not “investment contracts,” and therefore not securities; instead, the sale or other forms of trading are what matters, and analysts generally believe that this is a significant victory.

@ricenbeats0x pointed out that if, as stated in this judgment, listing XRP on exchanges does not make it a security, then the SEC’s lawsuit against Coinbase is “done for.”

Bill Hughes, a lawyer at ConsenSys, explained the court’s ruling on XRP: Ripple trading XRP on exchanges (and using these sales to fund its operations) is not an investment contract, and therefore not a security; paying wages with XRP is not an investment contract, and therefore not a security; Ripple directly selling XRP according to contracts is an investment contract, and therefore a security; Ripple clearly knew that doing so without registration was illegal; ultimately, a jury is needed to determine whether Ripple executives aided and abetted this unregistered issuance; it is expected that the SEC will immediately appeal to the Second Circuit Court of Appeals. In response, the SEC stated: We are pleased that the court found Ripple’s offer of investment contracts and sale of XRP tokens in certain cases violated securities laws. The court agreed with the SEC’s view that the Howey test governs the securities analysis of cryptocurrency transactions and rejected Ripple’s fictional test for what constitutes an investment contract, instead emphasizing that various tangible and intangible assets can be the subject of investment contracts in Howey and subsequent cases. In addition, the court rejected Ripple’s fair notice argument (another standard for determining securities), pointing out that the Howey test is clear and claiming ignorance cannot be a defense against violations of securities laws. We will continue to review this decision.

Subsequently, US exchanges such as Coinbase announced the relisting of XRP, and XRP’s 24-hour surge reached an astonishing 72%, with its market value soaring to fourth place and a total liquidation amount of 237 million US dollars in 12 hours, with 52.34 million US dollars in XRP. XLM rose by 57%, ADA rose by 22%, and SOL rose by 16%. Coingecko data shows that Upbit, the largest exchange in South Korea, ranks first in terms of trading volume in XRP, reaching 2.1 billion US dollars in 24 hours, followed by Binance with 1.7 billion US dollars, and OKX ranks third with 500 million US dollars; indicating that “familiar” Korean investors are still a significant driving force behind this surge. It is worth noting that XLM and ADA, which rank second and third in terms of 24-hour price increase, also have Upbit as the exchange with the highest trading volume. These two tokens, along with XRP, were tokens that Korean and Japanese investors were familiar with and actively participated in during the early stages.

LD Capital researcher @JinzeJiang0x0 believes that whether XRP itself is considered a security has not been directly confirmed, and this document does not cover all the charges made by the SEC. The court is reviewing the different sales and distributions of XRP, and whether these specific circumstances constitute the sale of securities or investment contracts. It cannot be concluded that “air coins are not securities” as many people believe. “Programmatic sales” refers to Ripple’s sales to “programmatic buyers” on digital asset exchanges, and does not refer to all retail investors in the secondary market. Therefore, it is incorrect to understand that “altcoin secondary sales do not violate securities laws”. The court ruling in this case in the Southern District of New York specifically states that the court did not discuss whether the secondary market sales of XRP constituted the sale of investment contracts, because the SEC did not submit this as a direct issue to the court. The charges made by the SEC against the founder’s unregistered sales of up to $600 million were also not discussed in detail in this court document. Tom Emmer, the Majority Whip of the U.S. House of Representatives, stated that the Ripple case is a milestone development that demonstrates that tokens and investment contracts are independent and distinct, and let us legislate it. My bipartisanship bill, the “Securities Clarity Act”, vividly portrays this concept to provide the necessary regulatory confidence to ensure that the design of the next generation of the Internet conforms to American values.

However, several U.S. lawyers interviewed stated: the logical conclusion is that the secondary sales of XRP are not securities transactions; this aspect will be seen in the Coinbase and Binance cases; but this ruling is not binding, and even judges in the same district court may disagree; the judge’s ruling can also be appealed to the Second Circuit Court of Appeals, and many experts predict that this will happen, since the appellate court often overturns the rulings of the trial court judges.

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