In a recent court ruling, Ripple achieved a partial victory in their legal battle against the U.S. Securities and Exchange Commission (SEC), bringing some clarity to the cryptocurrency industry’s regulatory landscape.
The U.S. District Court of the Southern District of New York ruled that the sale of Ripple’s XRP tokens on exchanges and through algorithms did not constitute investment contracts. However, the court did find that the institutional sale of the tokens violated federal securities laws.
The news of the ruling caused XRP to rally, and crypto exchange Gemini expressed interest in listing the token. However, legal experts have pointed out that this ruling does not fully resolve the question of whether and under what circumstances a digital asset can be classified as a security under U.S. law.
US District Judge Analisa Torres based her decision on the argument that institutional investors were more likely to be aware of the securities-like attributes of XRP when being pitched by Ripple. Conversely, retail investors who purchased XRP directly on a crypto exchange were not as knowledgeable. Both Ripple and the SEC might view this outcome as a potential win since it contributes to the ongoing debate over the security status of XRP.
It is important to note that applying the Ripple ruling as a positive precedent for the broader crypto market is not straightforward. The decision was based on the understanding of retail investors during a period that ended in 2020 when the value of Bitcoin was significantly lower and regulatory opinions on the industry were just forming. Since then, the cryptocurrency landscape has evolved and regulators have developed more defined perspectives.
It is possible that the SEC could address the court’s concern by ensuring that the definition of a security is clear to the general public in the future. This approach has been evident in the SEC’s lawsuits against other crypto companies, including Binance, Coinbase, and Gemini, where it identified tokens like Polygon’s MATIC and Algorand’s ALGO that could potentially face similar scrutiny as XRP.
However, the court disagreed with many aspects of the SEC’s argument regarding why XRP should be classified as a security, referring to the Supreme Court’s “Howey test.” One key point was that Ripple did not make any guarantees or promises to secondary-market buyers, which is also true for most exchange-traded instruments.
Some individuals interpret this early decision to mean that Coinbase and other exchanges accused of listing potential securities may now be in the clear, at least in terms of the general public purchasing those tokens on their platforms. However, this only addresses one aspect of the situation: the potential disruption of requiring retail-facing businesses to register or revamp their business models is possibly avoided.
Many successful crypto projects rely on early token sales to institutional investors and venture capitalists before their public launch, often with prior regulatory registration to avoid any potential legal consequences. The SEC cited these examples as reasons why the tokens should fall within its jurisdiction. With the recent ruling, this type of pre-funding through private sales may be restricted, unless venture capitalists are willing to purchase tokens on the open market where prices are subject to the same volatility as everyone else.
It is important to acknowledge that the SEC’s responsibilities related to crypto are increasing day by day. Recently, the watchdog joined three other authorities in filing charges against bankrupt crypto lender Celsius and its former CEO, Alex Mashinsky. Additionally, the SEC is preparing for a series of court hearings and trials involving complaints against exchanges like Binance and FTX. (Alex Mashinsky has denied the allegations.)
The Ripple case is still ongoing and will be scheduled for its own trial in the future. Therefore, despite the current celebration in the crypto market with prices soaring, there are enough uncertainties to leave the sector with a legitimate cause for concern.
*Disclaimer: This topic is only for informational purposes, not investment advice.