Ripple Labs Inc partially won a Securities and Exchange Commission lawsuit that has buoyed the cryptocurrency prices over the past week. The court ruled that some of the cryptocurrency transactions cannot count as securities sales.
The court decision will not be binding elsewhere but it demonstrates it is possible to challenge the Securities and Exchange Commission’s insistence that most digital assets are securities that have to be registered. These assets cannot be registered under the current regulations.
The ruling will also have a bearing on the myriad actions taken by the agency against a number of crypto exchanges along with other intermediaries. SEC filed the lawsuit against Ripple in December 2020 alleging that its $1.3 billion in sales of its XRP digital asset from 2013 were unregistered securities offering.
According to the court’s summary judgment, Ripple sold $757.6 million of XRP through programmatic sales to retail buyers. According to the court’s ruling, the use of XRP as payment for employee wages as well as other services did not satisfy the criteria of an investment contract.
The judgment states that while Institutional Buyers expected that the capital Ripple raised from its sales would go into building and improving the XRP ecosystem hence increasing the price of XRP, the programmatic buyers didn’t have the same expectations.
Ripple got 80 billion units of the XRP currency out of a maximum limit of 100 billion from the original founding team. The XRP was for the development of Ripple’s own blockchain, the XRP ledger. This markedly differs from other initial coin offerings that are sold to other investors by the currency creators. It is common for decentralized foundations or founding teams to retain considerable holdings of the coin issues.
However, the ruling also determined that $728.9 million of Ripple’s XRP sales to institutional investors constituted an illicit offering and that considering the “totality of circumstances”, the court found that reasonable investors, at the level of Institutional Investors, would have purchased XRP “with the expectation” that they’d earn profits from Ripple’s efforts.
The value of all cryptocurrencies rose almost 6% to $1.3 trillion following the announcement of the ruling. XRP price rose by 76% to 82 cents based on data by CoinGecko. The surge makes XRP the fourth-largest cryptocurrency at the moment.
The stock price at the Coinbase exchange rose by about 20% as company investors welcomed the ruling as a positive move in Coinbase’s own battle against the SEC which accused the company of running as an unregistered securities exchange, broker, and clearing agency. Ironically, in 2020, Coinbase dropped XRP from its trading platform following the SEC lawsuit.
The ruling did not, however, entirely give cryptocurrency exchanges a green light. In a footnote, the court stated that the ruling was based on “whether or not secondary transactions are security transactions”. In the footnote, the court added that there is no way for a user on these crypto exchanges to determine that Ripple is “on the other side.” The court, thus, concluded that an expectation of profit couldn’t have been there based on Ripple’s efforts.
According to some crypto analysts, the court’s logic could make it more difficult for future courts to argue that secondary sales constitute investment contracts.
The XRP ruling could also be appealed and may even end up in the Supreme Court even before the commencement of the trial.
There are issues that still need to be ironed out such as how to remedy the illegal institutional sales should the ruling hold. SEC could still pursue financial penalties like disgorgement of profit even though it can only pursue civil charges. Besides, the XRP ruling is not binding for other lawsuits involving SEC actions against crypto companies.