What The Ripple Ruling Means For Crypto

What The Ripple Ruling Means For Crypto

While Ripple Labs may have engaged in sales of unregistered securities, XRP itself is not a security – and that has huge implications for the rest of the crypto sector.

Last week brought a major development in the SEC’s case against Ripple Labs in the United States District Court in the Southern District of New York. Judge Analisa Torres granted summary judgment in favour of Ripple Labs, ruling that XRP is not a security.

It wasn’t all good news for Ripple, and there has been plenty of misunderstanding and misinformation to wade through. The market has now had time to digest the news, and some more measured commentary is coming out after the first, knee-jerk response. The consensus is that, although this was a partial win for Ripple Labs, it was a critical victory for the crypto world.

The key point in the ruling is that the XRP token is distinct from the investment contract in which it may or may not be involved. That is a huge distinction for the judge to make, and very good news for exchanges and many crypto tokens.

Token Sales And Securities Offerings

The SEC’s case against Ripple Labs began back in December 2020, when the agency sued Ripple, CEO Brad Garlinghouse, and Executive Chairman Chris Larsen.

In 2013, Ripple raised more than $1.4 billion by selling XRP to investors. The SEC claims that this was an unregistered security offering. Ripple’s position had been that the token was not a security, referring to comments made by a previous director of the SEC.

The definition of a ‘security’ is based on the Howey Test, a landmark case that took place almost a hundred years ago. Under the Securities Act of 1933 and the Securities Exchange Act of 1934, a transaction is an ‘investment contract’ and can be considered a security if there is an ‘investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.’ The decentralised nature of blockchain technology and crypto communities has led Ripple and other crypto projects to argue that the final criterion, the ‘efforts of others’, does not apply in the same way that it would to a company with a centralised structure, board, and so on.

The case has seen many twists and turns, and the crypto community has been watching developments closely for the last few months, as anticipation of a ruling has built. With the SEC recently taking aggressive enforcement action against numerous other crypto protocols and organisations, despite a lack of clear guidance for US crypto companies, a favourable verdict in the Ripple case would serve as a precedent that could turn the tide against the agency’s crusade against the digital asset sector.

Institutional Vs Retail Sales

Judge Torres ruled that the initial, direct sales of XRP to institutional investors may have been sales of unregistered securities. Ripple will continue to fight this in the courts with the SEC, and it’s possible that they will end up losing. However this is not a criminal court, and the worst that can happen is a fine (though possibly a large one).

For other crypto projects, it confirms what has generally been accepted in the space already: that ICOs and other similar token sales are likely to be considered securities offerings.

It’s the other part of the ruling that has given the crypto world such confidence. The court found that all other sales of XRP, including sales to retail traders via exchanges, do not count as securities offerings.

SEC spin doctors went into overdrive, seeking to portray the limited concession that Judge Torres made as a win for the agency. However, lawyers with extensive experience in the crypto sector have made it clear that’s not the case.

What Is The Ruling’s Significance?

The ruling makes it clear that XRP is not the same as an investment contract or security. Paul Grewal, Chief Legal Officer at Coinbase, tweeted: ‘Don’t be misled that Judge Torres ruled that sometimes XRP is a security and sometimes it isn’t. That’s exactly the opposite of what she ruled: XRP itself is NEVER a security… “XRP, as a digital token, is not in and of itself a ‘contract, transaction[,] or scheme’ that embodies the Howey requirements of an investment contract.”’

At a time when the status of crypto assets – specifically, whether they are commodities or securities – is under close scrutiny in the US, this sets a major precedent. Analyst Adam Cochran writes that, although the judge did rule that selling to institutional funds had been illegal, overall the news was very good for altcoins.

Ripple raised money in two main ways: sales to institutions, and dripping XRP into the market via exchanges’ order books. Ripple Labs is relatively centralised by the standards of crypto organisations, and as well as the exchange sales, they distributed tokens through bounties, grants, and payments to executives.

If none of these can be considered securities offerings, very little that trades on exchanges can be either (excepting tokens sold via IEOs, ICOs, launchpads, etc).

While there are no guarantees, the court’s decision makes it far harder for the SEC to claim that ETH – and many other cryptos – are securities. It also gives a green light for exchanges to list these tokens again. Indeed, major exchanges including Coinbase did immediately decide to relist XRP. It also raises questions for projects like Telegram, whose token sale was shut down by the SEC in 2019. The precedent set by Ripple may provide a way for such projects to raise money without falling foul of securities laws.

For non-US blockchain companies, like Chrono.Tech, the ruling is also important. Chrono.Tech is an Australian company, but the nature of the crypto space means that it has users and clients all over the world. The greater regulatory clarity means that it will become easier to do business with organisations in the US, including exchanges, and potentially with investors. The same is true for other crypto companies outside the US; the ruling helps to knit together – at least to some degree – a sector that was at risk of becoming fragmented at the global level due to the SEC’s crusade at the domestic one.

The ruling has been followed in Congress as well as by the crypto community. GOP Majority Whip Tom Emmer, who has been an active critic of the SEC for its stance on crypto, tweeted, ‘The Ripple case is a monumental development in establishing that a token is separate and distinct from an investment contract it may or may not be part of. Now, let’s make it law.’