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After two years of deliberations, the SEC v Ripple Labs case concluded, with the US judge Analisa Torres issuing her split decision.
In very broad terms, the ruling entails that:
Ripple’s coin $XRP is not in itself a security,
Retail sales and giveaways of $XRP are not breaching securities law,
Institutional sales, on the other hand, are considered unregistered investment contracts sales.
The ruling provoked a wave of enthusiasm in the crypto markets, particularly within the $XRP trade: the cryptocurrency spiked almost 100% in 3 days, slightly correcting since. The crypto world celebrated a victory, allowing itself to hope not only for the same principles applied to all altcoins but even for the eventual release from the SEC’s jurisdiction.
While this news may appear optimistic, it also brings forth uncertainties and concerns. Will the ruling stand the appeal in case the SEC decides on it? How is it possible for an asset to be a security, and then not be a security?
The questions are many, and understanding the details of the ruling can help us evaluate their plausibility.
Details of the SEC v Ripple ruling
These are the main thesis of the ruling, and some of the possible conclusions:
- XRP, as a digital token, is not and of itself a “contract, transaction, or scheme” that embodies the Howey requirements of an investment contract.
Ripple Labs is considered a relatively centralized crypto company, and strictly speaking, the XRP Ledger is not even public, it is permissioned. The degree of decentralization has played an important role in assets’ qualification by the SEC (e.g., Gary Gensler claimed that Bitcoin's decentralization exempts it from being a security). This could suggest that if $XRP is not a security, most other cryptos sold on exchanges are probably neither.
This could also imply that cryptoassets as a class are beyond the SEC’s jurisdiction.
- Programmatic sales of $XRP do not constitute the offer and sale of investment contracts as “Programmatic Buyers purchased XRP with an expectation of profit, but they did not derive that expectation from Ripple’s efforts (as opposed to other factors, such as general cryptocurrency market trends) – particularly because none of the Programmatic Buyers were aware that they were buying XRP from Ripple.”
This means that selling crypto on exchanges is fine because their buyers can be unaware of the links between the coin and its issuer’s performance – and this is very good news for Coinbase, recently sued by the SEC.
This could also mean that crypto exchanges are beyond the SEC’s jurisdiction, aligning with long-standing claims from the Commodity Futures Trading Commission (CFTC).
- "Other" sales of $XRP do not constitute the offer and sale of investment. Crypto contracts given for free (bounties, investments, grants, and transfers to executives and developers) are not concerned by the securities law as the receivers never put up any investment.
- Institutional sales of $XRP constitute the unregistered offer and sale of investment contracts, as these buyers are “sophisticated” enough to understand the token’s link to its issuer’s performance.
Consequently, ICO, Launchpad, OTC, and other centralized forms of crypto fundraising are likely to be classified as securities and must comply with the law.
In other words, XRP is both an unlawfully sold investment contract when sold to institutional buyers, and a lawful asset when sold via crypto exchanges or distributed to employees or the community. This part of the ruling is highly controversial.
Too early to celebrate?
Following the news, Coinbase, Binance US, and Kraken have resumed $XRP trading.
However, doubts persist.
Firstly, there is the question of whether the SEC will appeal the judge's decision. Gary Gensler said the SEC was “disappointed” on the part about retail investors and was assessing the court’s opinion.
Secondly, as persuasive as the decision was, it is not a binding precedent for other courts, and the SEC may continue pursuing similar cases in the future.
The US crypto industry needs comprehensive regulations, and while the SEC v Ripple case does not suffice alone, it could serve as a foundation for new legislation.
Last week, Congressman Tom Emmer proposed to inscribe into law parts of the ruling about crypto not being a security.
Senator Cynthia Lummis pointed out that Lummis-Gillibrand Responsible Financial Innovation Act, introduced last year, already mentioned that cryptoassets traded in secondary markets are not securities.
Written by D.Center
