The duality of digital assets got a stamp of approval from a federal judge Thursday (July 13).
Cryptocurrency company Ripple defeated many crucial elements of a U.S. Securities and Exchange Commission (SEC) enforcement case against its sale of over $1.4 billion of its own XRP digital tokens.
The landmark ruling dulls the sharp teeth of the SEC’s ongoing existential threat to the crypto industry in America. Ripple’s XRP token has risen sharply on the news, trading up more than 70% as of Thursday afternoon.
The ruling by U.S. District Judge Analisa Torres — while just an intermediate decision in a larger case — will have far-ranging repercussions across the digital asset ecosystem, which has long argued that its tokens do not represent securities contracts.
Torres confirmed that programmatic sales of Ripple’s XRP token to individual investors fail to meet the criteria establishing that they constitute illegal securities offerings.
The ruling will have a foundational impact on many of the cases currently being brought against the sector regarding its noncompliance with established securities laws by the SEC, including those against two of the world’s largest crypto exchanges, Coinbase and Binance.
However, that’s just half the story.
The judge separately ruled that Ripple’s XRP token is, legally, a security when it is sold to institutional investors.
“The SEC’s motion is granted in part and denied in part, and defendants’ motion is granted in part and denied in part,” Torres wrote in the order.
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Since the filing of the first SEC suit against Ripple Dec. 22, 2020, the crypto industry has been waiting with bated breath for a final ruling on whether digital assets are, or are not, securities.
So, what does it all mean now that they both are and aren’t?
Two different things, naturally, depending on whether one is a member of the general retail investing public or an institutional investor — or one of the countless crypto companies looking for legal and regulatory clarity.
The landmark language in the case that sets the widest precedent is, per Torres, the statement that: “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. Rather, the court examines the totality of circumstances surrounding defendants’ different transactions and schemes involving the sale and distribution of XRP.”
Ripple Chief Legal Officer Stuart Alderoty responded to the news on Twitter, tweeting: “A huge win today — as a matter of law — XRP is not a security. Also a matter of law, sales on exchanges are not securities. Sales by executives are not securities. Other XRP distributions — to developers, to charities, to employees — are not securities.”
A huge win today – as a matter of law – XRP is not a security. Also a matter of law – sales on exchanges are not securities. Sales by executives are not securities. Other XRP distributions – to developers, to charities, to employees are not securities.
— Stuart Alderoty (@s_alderoty) July 13, 2023
As it relates to activity by the general public, Torres wrote in her ruling that Ripple’s programmatic sales were “blind bid/ask transactions,” which occurred under different circumstances from the institutional sales. “The institutional buyers were sophisticated entities, including institutional investors and hedge funds.”
“There is no evidence that a reasonable programmatic buyer, who was generally less sophisticated as an investor, shared similar ‘understandings and expectations’ and could parse through the multiple documents and statements that the SEC highlights,” Torres wrote.
Because individual buyers generally buy crypto using exchanges where the seller is not disclosed, they had no way of knowing whether the seller of the tokens was Ripple itself nor whether their purchase would directly impact the company’s ability to drive up the value of its tokens. Therefore, the sales did not represent securities offerings.
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“Defendants do not dispute that they offered to sell and sold XRP through interstate commerce,” Torres wrote. “They also do not dispute that they did not file a registration statement with the SEC for any offer or sale of XRP. The question before the court is whether defendants offered to sell or sold XRP as a security.”
And, as the court found, Ripple did offer to sell its XRP token as a security, but only to sophisticated buyers like institutional investors and hedge funds, who knew the seller of XRP was Ripple and relied on the company to make the value of their purchased tokens appreciate.
“Clearly, the institutional buyers would have understood that Ripple was pitching a speculative value proposition for XRP with potential profits to be derived from Ripple’s entrepreneurial and managerial efforts,” Torres ruled.
This additional and crucial context around institutional transactions, which per the SEC lawsuit represents $728.9 million of XRP sales, meets the test for an investment contract under federal securities law.
As PYMNTS wrote Wednesday (July 12), it’s important to remember that the SEC doesn’t make the rules; it just enforces them, whatever they may be and however they are written. As a federal agency, the regulator’s powers remain ultimately dependent on legislative decisions made by lawmakers.
While Thursday’s Ripple ruling will have no impact on crypto operations that are alleged to have been operating fraudulently and engaging in bad-faith market manipulation tactics, it will set a legal precedent for those firms alleged to have been issuing token-securities non-compliantly, and may undermine certain assertations of the SEC.
Still, the judge’s ruling in the Ripple versus SEC case applies to a single token, XRP, and not all digital assets.
At the very least, the ruling might add pressure to U.S. lawmakers to pass legislation clarifying the status of digital assets.
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