Ripple Labs Triumph in The SEC Case Over XRP Cryptocurrency

In a significant legal victory, blockchain company Ripple has secured a favourable ruling in its lawsuit with the Securities Exchange Commission. Judge Analisa Torres delivered the ruling on July 13. The judge dismissed the SEC-instigated case recognizing XRP token does not fall under the securities category.

Ripple’s XRP was up 70% by late Thursday. This ripple effect also catapulted BTC upwards of $1,000+. However, the SEC also had a partial victory when the federal judge ruled that XRP is considered a security when sold to institutional investors. This ruling was based on the conditions outlined in the Howey Test.

The SEC filed a lawsuit against Ripple, aiming to force them to discontinue offering their XRP token because it qualified as a security and therefore needed to be subjected to additional regulatory measures. The court clarified that it lacked jurisdiction to address this specific question. It explained that determining whether a secondary market sale qualifies as an offer or sale of an investment contract would necessitate thoroughly examining the contract, transaction, or scheme in question.

Following the news, XRP experienced a rally, and crypto exchange Gemini expressed its potential interest in listing the token. However, initial insights from legal experts suggest that the ruling falls short of fully resolving whether a digital asset qualifies as a security under U.S. law and under what circumstances.

Under the leadership of Chairman Gary Gensler, the SEC has argued that most digital assets meet the criteria of being securities. As a result, they insist on issuers undergoing a lengthy and costly registration process before making them available to the public and exchanges being required to register as broker-dealers before listing them. On the other hand, the industry maintains that it remains unclear how laws crafted initially decades ago, can be effectively applied to an asset class that originated on the internet.

The court released its findings in an order that partially granted a motion for summary judgment in the significant SEC case against the blockchain platform.

When Crypto is not a Security

In 2020, SEC had lodged allegations against the company and its current and former CEOs, claiming that they conducted an unregistered securities offering of $1.3 billion by selling XRP, a digital asset created by Ripple’s founders, back in 2012.

The outcome of this case has been eagerly followed within the cryptocurrency industry, which disputes the SEC’s stance that most crypto tokens are securities and should adhere to their strict investor protection regulations. The SEC has initiated over 100 enforcement actions related to cryptocurrencies, contending that numerous tokens qualify as securities, but many of these cases have been settled outside of court.

In the rare instances where such matters have proceeded to court, judges have generally sided with the SEC, affirming that the crypto assets in question should be classified as securities. Unlike commodities and similar assets, securities are subject to strict regulations, requiring issuers to register them with the SEC and provide comprehensive disclosures to inform investors about potential risks.

Judge Torres, however, ruled that Ripple’s sales of XRP on public cryptocurrency exchanges should not be considered securities offerings under the law. Her rationale was that purchasers did not possess a reasonable expectation of profit linked to Ripple’s efforts. She described these transactions as “blind bid/ask transactions” where buyers were unaware if their payments were directed to Ripple or any other seller of XRP.

To arrive at her decision, Torres applied a precedent set by the U.S. Supreme Court, which stated that an investment contract is a type of security involving “an investment of money in a common enterprise with profits to come solely from the efforts of others.”

Furthermore, Judge Torres determined that the XRP sales on cryptocurrency platforms conducted by CEO Brad Garlinghouse, co-founder and former CEO Chris Larsen, and other distributions, including employee compensation, did not fall under the category of securities.

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