Ripple wins a phased victory, XRP's securities attributes are still undetermined, SEC may continue to appeal

On July 13th local time, U.S. federal judge Analisa Torres ruled that Ripple Labs Inc. did not violate federal securities laws by selling XRP tokens on public exchanges and through algorithms. This is the first time that a U.S. judge has made a ruling in favor of Ripple, which may set a precedent for future token classification cases and the crypto community cheered.

XRP tokens also soared. According to BitPush terminal data, XRP rose nearly 80% to $0.81 that day, hitting a new high in more than a year. Solana (SOL), Polygon (MATIC) and Cardano (ADA), a variety of tokens that were once considered securities by the SEC , rose 15% after the news broke.

Coinbase, which had previously delisted XRP from its trading platform, announced Thursday afternoon that it would allow the asset to be traded again. Another U.S. exchange, Gemini , said it was “exploring the listing of XRP for spot and derivatives trading.”

Ripple founder Garlinghouse celebrated the outcome in a post on Twitter, writing: “Thank you to everyone who helped us reach today’s decision — this decision is for all crypto innovation in America, and more to come.”

A complex ruling: Is XRP a security?

Bitpush previously reported that on December 22, 2020, the SEC officially announced the indictment against Ripple and its founders Brad Garlinghouse and Christian A. Larsen. The document stated that since 2013, Ripple and its founders have sold more than 14.6 billion units of digital asset securities "XRP" in exchange for more than US$1.38 billion in funds. The defendants did not register their offers and sales of XRP, nor did they obtain any registration exemptions, violating the registration provisions of the federal securities law.

The new ruling does not represent a complete victory for Ripple, as the judge also ruled in favor of the U.S. Securities and Exchange Commission (SEC).

Analisa Torres ruled that Ripple’s sale of $728.9 million of XRP directly to institutional investors amounted to unregistered securities sales in violation of federal securities laws. The ruling stated: “After considering the economic realities and the totality of the institutional sales, the Court concludes that Ripple’s institutional sales of XRP constituted an unregistered offer and sale of investment contracts in violation of Section 5 of the Securities Act.”

Stephen Palley, a partner at the law firm Brown Rudnick, analyzed in his article that the view that XRP is clearly not a security is wrong.

The lawyers believe that the ruling is divided into three parts to analyze the factual circumstances surrounding XRP sales: institutional sales, sales through algorithms, and "other distributions," such as employee compensation.

When it came to “Ripple’s sales of XRP to a sophisticated network of individuals and entities,” the court sided with the SEC, saying those were securities transactions and constituted investments. However, when it came to “programmatic” sales, or sales through trading algorithms and other distribution methods, Ripple won.

Palley highlighted another important question: whether cryptocurrency exchanges like Coinbase need to register themselves as securities exchanges. The SEC has made it clear that most traded crypto assets should be considered securities. However, Palley said the court did not reach a conclusion on the matter, which is another (invisible) 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 ruling that exchanges selling XRP are not a security, we are beginning to clarify what constitutes a security and what constitutes a commodity - the SEC will have to revise their strategy in several ongoing cases, and I expect this ruling will apply to several other tokens as non-securities."

Martin added: “Ripple’s ruling that institutional sales of XRP constitute securities also has a huge impact on the industry, with some ICOs now likely to be in the spotlight. For exchanges caught up in SEC litigation, it is unclear how this ruling will affect them, most of which were only involved in secondary sales. But as we can see from the price today, the market is very optimistic about this ruling.”

How the SEC Responded

The SEC responded to the court's ruling. The SEC told Fox News that it was satisfied with part of the ruling but was still weighing the court's final decision.

The SEC responded: "The court held that Ripple offered and sold XRP tokens in the form of investment contracts in violation of securities laws in some cases. We are satisfied with this part of the ruling. The court agreed with the U.S. Securities and Exchange Commission (SEC) that the Howey test can be used to analyze whether crypto transactions are securities, and rejected Ripple's self-test on what constitutes an investment contract, but emphasized 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, pointing out that the Howey test is clear and claiming ignorance is not a defense for violating securities laws. We will continue to weigh this decision of the court."

ConsenSys lawyer Bill Hughes predicted in his tweet that the SEC should appeal to the Second Circuit Court. He said: "The SEC's enforcement strategy has been severely hit, the SEC's pseudo-legislation through overly broad rulemaking has been severely damaged, and the SEC Chairman's credibility in the government and on Capitol Hill will be at an all-time low."

Some cases are still under trial. The judge refused to rule on the SEC's allegations that Garlinghouse and Larsen aided and abetted Ripple's illegal activities, including selling products to institutional investors. This means that unless the two parties reach a settlement or the SEC gives up, the allegations will continue to be left to a jury trial, and the specific trial date has not been set.

Call for legislation

The Ripple case is far from over, and today’s ruling is a trial court decision, some of which will likely be appealed and overturned. But the ruling has sparked new calls from the crypto industry for legislation to provide clear rules for tokens and for Congress to clarify the status of digital assets.

Katten Muchin Rosenman attorney Gary DeWaal said the ruling could help Coinbase’s case, and he said the market reaction showed the result was “a significant event for the industry” and a sign that Congress must pass legislation to set standards for digital assets.

House Majority Whip Tom Emmer , a Republican, posted on Twitter that the resolution makes clear that “tokens are separate and distinct from investment contracts and may or may not be investment contracts. Now is the time for legislation.”