Ripple v SEC Verdict & the Future of Crypto
Ripple (XRP) and the cryptocurrency industry got a partial victory in the ongoing debate on whether cryptos are securities under US laws.
Ripple (XRP) and the cryptocurrency industry got a partial victory in the ongoing debate on whether cryptos are securities under US laws.
The case was filed by the US Securities and Exchange Commission (SEC) in December 2020 alleging that Ripple was offering an unregistered security. The document is here: https://www.sec.gov/litigation/complaints/2020/comp-pr2020-338.pdf
The case claims that Ripple violated federal securities laws by selling 14.6 billion XRP tokens for over $1.38 billion without registering their offers & sales with the SEC.
Types of XRP sales
The XRP sales were of 2 types:
1. Institutional Sales
Ripple sold XRP directly to institutional buyers & hedge funds pursuant to written contracts.
2. Programmatic Sales
Ripple sold XRP on digital asset exchanges "programmatically" or through the use of trading algorithms.
These sales were blind bid/ask transactions in which Ripple did not know who was buying the XRP, and the purchasers did not know who was selling it.
Applicable laws
The primary laws relevant in this case are:
1. Securities Act
Section 5 of the Securities Act makes it "unlawful for any person, directly or indirectly,... to offer to sell, offer to buy or purchase, or sell" a "security" unless a registration statement is in effect or has been filed with the SEC as to the offer and sale of such security to the public.
2. Howey Test
The Howey Test is derived from the US Supreme Court in SEC v. W.J. Howey Co.
The court held that under the Securities Act, an investment contract is "a contract, transaction, or scheme whereby a person:
- invests his money
- in a common enterprise and
- is led to expect profits solely from the efforts of the promoter or a third party."
The court ruling
In its 13 July ruling a New York court has held that:
... SEC's motion for summary judgment is GRANTED as to the Institutional Sales, and otherwise DENIED. Defendants’ motion for summary judgment is GRANTED as to the Programmatic Sales... and DENIED as to the Institutional Sales.
The Court will now issue a separate order setting a trial date and related pre-trial deadlines.
The case document is here: https://www.nysd.uscourts.gov/sites/default/files/2023-07/SEC%20vs%20Ripple%207-13-23.pdf
🎯 Impact on the Future of Crypto
To simplify, the Ripple vs SEC case is about whether Ripple (XRP) should have registered their sales of XRP tokens as securities with the SEC.
The SEC alleges that Ripple violated federal laws by not doing so, while Ripple contends that XRP is a digital asset, not a security.
The verdict provides a mixed result, where the court ruled in favor of the SEC regarding Ripple's direct institutional sales, and in favor of Ripple regarding programmatic sales on digital asset exchanges.
These two types of sales are considered differently under securities law.
The significance of this case is that it could potentially determine how cryptocurrencies are classified and regulated in the United States.
This decision gives some direction but doesn't provide a definitive answer on whether all cryptocurrency tokens will be treated as securities.
As long as projects take adequate precautions based on the learnings of the Ripple case, there is a very low chance that their tokens will be considered securities.
If your project wants clarity on how this case impacts your tokens, get in touch with us.