Ruling grants partial victories to both Ripple and the Securities and Exchange Commission (SEC) in the XRP case
In a significant turn of events, the U.S. District Court for the Southern District of New York has ruled that Ripple's token XRP is considered a security when sold to institutional investors, but not to the general public. This decision, which could have far-reaching implications for the cryptocurrency industry, was handed down by Judge Sarah Netburn on Thursday.
The SEC, which filed the lawsuit against Ripple in 2020, claimed that the company, along with CEO Brad Garlinghouse and co-founder Chris Larsen, violated investor-protection laws by selling about $1.4 billion in XRP. However, the court's ruling only applies to the sale of XRP to institutional investors.
The SEC's strategy has been characterized as "regulation by enforcement" by Stuart Alderoty, Ripple's general counsel. In response to the ruling, Garlinghouse took to Twitter, stating that they were on the right side of the law and will be on the right side of history.
Meanwhile, Coinbase, which is currently embroiled in its own legal battle with the SEC, re-listed XRP on its platform following the decision. The price of XRP surged more than 70% on Thursday, according to The Wall Street Journal. Coinbase had been sued last month by the SEC for operating an unregistered national securities exchange, broker, and clearing agency.
The SEC's interpretation of the Howey test for securities analysis of crypto transactions was supported by the court, although the agency indicated that the court agreed with their interpretation only in the context of institutional investors. This means that XRP transactions with the general public are not considered securities.
The ruling could potentially set a precedent for other cryptocurrencies, as the SEC reviews the decision. Appeals of the general-public portion of the ruling may delay the trial. Chris Martin, head of research at Amberdata, stated that the SEC will have to revise their tactics on several of their ongoing cases.
Philip Moustakis, a partner at Seward & Kissel, suggested that if the 2nd Circuit Court of Appeals adopts Torres' logic, much of the Coinbase case would be "toast." Paul Kisslinger, a former SEC trial attorney, concurred, stating that Thursday's ruling will have a profound impact on cases going forward.
The ruling has sparked a flurry of reactions from industry insiders. Winklevoss tweeted that the decision relegates the SEC to traditional finance and makes it a dinosaur regulator. Garlinghouse, in a later interview with Bloomberg, characterized the SEC as a "bully."
Matthew Solomon, an attorney for Garlinghouse, expressed confidence that a jury will find the SEC's remaining charge to be baseless. Despite the ruling, the SEC sees Thursday's decision as a win, too. More than a handful of commenters called Torres' ruling a "watershed moment."
According to Reuters, $728.9 million of the total amount sold by Ripple was classified as unregistered sales of securities. However, roughly $757 million did not fall under this classification. Coinbase sued the SEC in April to force the agency to divulge how it defines a security.
As the cryptocurrency industry continues to evolve, these rulings and legal battles will undoubtedly shape the future of digital assets and their regulation.
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