What the Ripple (XRP) SEC Lawsuit Means For Crypto

KEY TAKEAWAYS

A US Judge has ruled that Ripple's XRP sales on public cryptocurrency exchanges were not offers of securities under the law. This has raised questions about the potential implications for other cryptocurrencies, particularly those previously categorized as securities by the SEC.

The lawsuit brought by the U.S. Securities and Exchange Commission (SEC) against Ripple Labs, the company behind Ripple (XRP), has proven to be one of the most important regulatory battles in the history of cryptocurrency

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In 2020, the SEC filed a lawsuit against Ripple Labs, alleging that it conducted an unregistered securities offering through the sale of its XRP tokens worth $1.3 billion. 

The lawsuit argued that XRP should be classified as a security, similar to stocks or bonds, and therefore would be subject to SEC regulation.

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However, U.S. District Judge Analisa Torres ruled partially in favor of Ripple on July 13 2023, and in September, lawyers representing Ripple argued the SEC had not met the requirements to request an appeal. 

Did Ripple (XRP) or the SEC Win the Lawsuit?

The July ruling, issued by the District Court for the Southern District of New York, stated that the “offer and sale of XRP on digital asset exchanges did not amount to offers and sales of investment contracts.”

The federal judge also ruled that XRP is a security when sold to institutional investors, as it met the conditions set in the Howey Test.

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The SEC Ripple lawsuit is important for crypto as it could provide clarity regarding the regulatory status of cryptocurrencies and how they are classified by the SEC. 

If the court had agreed with the SEC, it could have set a painful precedent for how other cryptocurrencies are treated, potentially leading to increased regulation and oversight in the industry

This would impact not only Ripple and XRP but also other projects that have conducted initial coin offerings (ICOs) or token sales.

Instead, Ripple secured a partial win, setting a precedent that should have a positive impact not only on XRP but also on the broader crypto market. 

Ripple’s Win Against SEC Could Challenge SEC’s Jurisdiction Over Crypto

The crypto industry has been facing regulatory pressure from the SEC amid increased calls for regulatory clarity in the sector. 

Specifically, the commission has taken enforcement action against some major crypto exchanges like Kraken and Bittrex, as well as the crypto lending platform Nexo.

More recently, the SEC joined forces with other regulatory agencies and filed a complaint against the CEO of bankrupt crypto lender Celsius, Alex Mashinsky.

The court filing by the agency includes four counts of fraud and one count of securities violation. The complaint argues that Celsius (CEL) and its Earn product should be classified as securities.

However, the SEC’s most high-profile complaint came last month when the agency sued both Binance (and some of its affiliates), the world’s largest cryptocurrency exchange, and Coinbase, the largest US-based cryptocurrency exchange.

In each case, the SEC claimed that several tokens listed by the exchanges are unregistered securities, including dozens of popular cryptocurrencies like Binance’s native token BNB, solana (SOL), cardano (ADA), polygon (MATIC), filecoin (FIL), cosmos (ATOM), sandbox (SAND), decentraland (MANA), algorand (ALGO), axie infinity (AXS), and coti (COTI).

Following the recent ruling in the SEC Ripple lawsuit, many of these tokens may no longer be considered securities under the new precedent. However, each token’s case may still need to be clarified in court. The prices of many named tokens soared following the ruling as investors expected a return to normal.

“This is a significant opinion that has the potential to change the landscape of the SEC’s enforcement efforts or the success of those efforts,” said Teresa Goody Guillén, a former attorney with the SEC office of the general counsel, and now a partner with law firm BakerHostetler. 

“This is also helpful precedent for Coinbase and Binance to defend against allegations that they are operating as unregistered securities exchanges, brokers and clearing agencies.”

Several other legal experts further noted that the federal judge’s ruling may have essentially declared token sales on retail exchanges weren’t investment contracts under the law (and thus, the tokens are not securities) even though XRP coins sold to institutions such as hedge funds and the like were deemed securities.

“The court rejects the view that cryptocurrency tokens are securities, which has previously led to widespread confusion,” Jeffrey Alberts of Pryor Cashman LLP reportedly said, adding that the judge had clarified in her ruling that crypto tokens are not themselves securities.

Ripple Has Yet to Celebrate its Win Against the SEC 

While many crypto pundits have rejoiced about Ripple’s recent partial win, others noted that the industry’s fight for regulatory clarity is likely far from over.

Preston Byrne, partner at Brown Rudnick and a crypto entrepreneur, said the SEC is currently reviewing the decision, claiming that the agency might challenge the ruling. 

“The Ripple summary judgment is obviously not the last word on the issue,” Byrne said in a recent tweet, noting that even if Ripple accepts the win, the firm still “got multi-billions of dollars in institutional sales that they’re on the hook for.”

Others also claimed that the summary judgment may not have a strong foundation and may not result in the desired change in how the SEC treats the crypto industry. 

Joe Castelluccio, leader of law firm Mayer Brown’s Fintech group, said that the SEC will likely highlight the parts of the court decision that support their views on coins and tokens as securities. Castelluccio also emphasized that the case does not clarify the various other regulatory issues faced by the digital assets sector.

As expected, on August 9, the SEC announced intentions to file an “interlocutory appeal” of the ruling. In a court filing, the regulator said an appeal could address legal issues on which there was “substantial ground for differences of opinion.”

“Specifically, the SEC seeks to certify the Court’s holding that Defendants’ ‘Programmatic’ offers and sales to XRP buyers over crypto asset trading platforms and Ripple’s ‘Other Distributions’ in exchange for labor and services did not involve the offer or sale of securities under [the Howey test],” the filing read.

However, in the latest XRP lawsuit news, lawyers representing Ripple have argued that the SEC hasn’t met the requirements to request an appeal. 

In a September 1 filing, they claimed that the SEC’s grounds for an appeal largely rested on “dissatisfaction” with a judge’s decision that the XRP token did not qualify as a security for sales to retail investors.

The lawyers said “exceptional circumstances required for interlocutory appeal” were absent in the case and called on the judge to deny any request for an appeal or stay.

“The SEC has not even attempted to meet the standard for a stay, even after the Individual Defendants identified that omission in their pre-motion letter.”

As of late, there have also been rumors about a settlement between Ripple and the SEC. In a recent tweet, pro-XRP lawyer John Deaton said that if the judge in the Coinbase case grants the exchange’s motion to dismiss, it would indicate that token sales on the exchange are not subject to securities laws. 

He claimed that if Coinbase’s motion to dismiss the lawsuit is approved, the SEC’s ability to pursue an appeal would be considerably constrained, making a settlement a logical option. 

Editorial note (September 10, 8:30 AM EST): This article was updated to include the latest XRP lawsuit update. 

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Ruholamin Haqshanas

Ruholamin Haqshanas is a cryptocurrency and finance journalist with over three years of experience in the field. He has a bachelor's degree in Mechatronics and a keen interest in the FinTech space. He began as a freelance technology writer but turned to crypto after delving into the industry in 2019. Ruholamin has been featured in a number of financial and crypto news outlets, including CryptoNews, Investing.com, 24/7 Wall St, The Tokenist, Business2Community, ZyCrypto, EthereumPrice.org, Milk Road, and others. He has also worked with some major crypto and DeFi projects as a content creator, including Midas Investments, BullPerks/GamesPad, and Equalizer Finance.