Partial Ripple Victory: Judge Rules That XRP Is Not a Security

July 13, 2023

In a significant development for the crypto industry, a federal judge has ruled in favor of Ripple Labs, stating that its digital asset, XRP, is not itself a security in secondary market transactions. The decision comes as part of an ongoing lawsuit brought by the Securities and Exchange Commission (SEC) against Ripple, alleging that the company conducted an unregistered securities offering by selling its token, XRP.

This ruling has far-reaching implications for the cryptocurrency industry and sets a potential precedent for future token classification cases.

Institutional vs. Programmatic Sales

In the United States District Court in the Southern District of New York, Judge Analisa Torres analyzed the transactions and schemes involving the sale and distribution of XRP as a whole, rather than focusing on the token itself.

The court’s ruling differentiates between Ripple’s institutional sales of XRP (direct sales from the company to institutional investors) and programmatic sales on the secondary market (including purchases by retail investors on cryptocurrency exchanges).

The court found that Ripple’s institutional sales constituted an unregistered securities offering, but determined that programmatic sales did not fall under the same category.

Programmatic Sales Not a Securities Offering

The court noted that the majority of individuals who purchased XRP from crypto exchanges did not invest their money in Ripple at all. The court emphasized that these programmatic buyers, who accounted for less than 1% of the global XRP trading volume, “could not have known if their payments of money went to Ripple, or any other seller of XRP.”

The court concluded that Ripple’s programmatic sales did not meet the criteria for the offer and sale of investment contracts.

The judge’s ruling is a significant milestone after a protracted three-year legal battle between Ripple and the SEC. It not only provides clarity on the status of XRP but also has the potential to shape the regulatory framework surrounding digital assets.

Institutional Sales Were an Unregistered Securities Offering

Although Ripple secured a significant win in regard to programmatic sales, the court ruled in favor of the SEC regarding $728 million in institutional sales.

To assess the institutional sales, the court employed the Howey test, a legal framework commonly used to determine whether a transaction qualifies as an investment contract:

  • The court established that there was an “investment of money” in the relevant transactions.
  • The court determined that a “common enterprise” existed because “the investors’ assets are pooled and the fortunes of each investor are tied to the fortunes of other investors, as well as to the success of the overall enterprise.”
  • The court concluded that reasonable institutional buyers would expect to derive profits from Ripple’s efforts when purchasing XRP.

Consequently, the court granted the SEC’s motion for summary judgment regarding the institutional sales. However, it denied the motion concerning programmatic sales, other distributions, and the sales made by Ripple’s executives, Christian Larsen and Bradley Garlinghouse.

Is the XRP Token a Security?

The judge’s ruling solidifies the position that the XRP token itself is not a security. It clarifies 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.”

Instead, the court analyzed the “transactions and schemes involving the sale and distribution of XRP.”

Is This Ruling Final?

It’s important to note that while this ruling represents a significant victory for Ripple, the legal battle may not be over just yet. The SEC has the option to appeal the court’s decision. Given the high stakes and the potential impact on future regulatory cases, it is likely that the SEC will consider appealing the ruling.

An appeal would mean that the case could be taken to the 2nd Circuit Appellate Court for further review and a final determination. The appellate court would reevaluate the arguments and evidence presented by both parties, potentially leading to a different outcome or further clarification of the legal standards applied to digital assets.

If the SEC appeals this ruling, the legal battle could continue for years to come. This could be appealed to the Supreme Court of the United States if different Circuit courts come to conflicting decisions regarding cryptocurrency as securities.

Impact on Cryptocurrency Industry

The court’s ruling in regard to the XRP token and programmatic sales on crypto exchanges is good news for many in the industry.

The SEC has recently come after several exchanges, including Coinbase and Binance, in part for selling securities without proper registration. This ruling could undermine some of the SEC’s arguments in those cases.

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