Ripple’s lengthy court battle with the United States Securities and Exchange Commission came to a compromising end in the District Court in the Southern District of New York, as Judge Analisa Torres ruled that XRP is not a security when sold on cryptocurrency exchanges.
The ruling, which was handed down on July 13, ruled in favor of Ripple finding that XRP is not a security in the context of “programmatic sales on digital asset exchanges ‘.
The SEC’s case against Ripple was warranted in part, given that Torres also ruled that XRP was considered to be a security when sold to institutional investors. The judge found that institutional investment in XRP met the conditions of the Howey Test , the methodology created in 1933 by the SEC which determines whether certain transactions are deemed to be investment contracts.
For retail investors, the decision has been a boon that had an immediate effect on the value of XRP, which saw gains in excess of 60% in the 24 hours following headlines of the outcome of its court case.
The situation creates an interesting precedent in the context of the SEC’s ongoing lawsuits against the likes of Binance.US and Coinbase for separate, alleged securities offerings violations.
The SEC’s allegations against Binance.US also list the likes of Cardano (ADA), Polygon (MATIC), and Solana (SOL) as unregistered securities on Binance.US, which had a marked effect on the value of these smart contract blockchain ecosystem tokens over the past few months.
A legal deep-dive into Judge Torres’ findings from Protos provides plenty of food for thought on the subject. The news site unpacks the details of the findings, highlighting that Torres’ decision did not necessarily reflect the majority of XRP tokens on the market.
As the post explains, Torres’ ruling states that Ripple illegally sold $728 million worth of unregistered securities via institutional sales of XRP. Meanwhile, the judge also cleared Ripple of illegally offering $757 million worth of unregistered securities via programmatic sales of XRP.
The SEC had also alleged that Ripple illegally offered $609 million worth of other distributions of XRP including bonuses, compensation for labor, and other payments.
Torres’ finding that programmatic sales of XRP, those made on exchanges through “blind bid/ask transactions”, were not unregistered securities excludes 99% of global XRP trading volume since 2017:
“The Court does not address whether secondary market sales of XRP constitute offers and sales of investment contracts because that question is not properly before the Court.”
Nevertheless, 99% of XRP transactions since 2017 were not part of the legal battle so no judgment was needed there, but it does suggest that the cryptocurrency community somewhat exaggerated the findings of the court case.
While Judge Torres’ findings are nuanced, her ruling that programmatic sales of XRP does beg the question as to whether a similar finding might be reached in the cases against ADA, MATIC, and SOL in particular.
The three tokens were listed alongside Filecoin (FIL), Cosmos Hub (ATOM), The Sandbox (SAND), Decentraland (MANA), Algorand (ALGO), Axie Infinity (AXS), and COTI (COTI) as unregistered securities offered by both Binance.US and Coinbase.
The enforcement actions had a marked effect on the markets, with the tokens losing a combined market of over $5 billion.
The teams behind Cardano, Polygon, and Solana have all challenged the allegations set out by the SEC following the enforcement action. As evident by the SEC vs Ripple case, any outcome will likely only be reached in the coming years.
It does however show the sale of cryptocurrency tokens and the specific method in which they’re bought or traded can be looked at under a microscope leading to various legal outcomes.
As we’ve explored, the conditions upon which Judge Torres found that XRP was not a security were very specific, looking at programmatic trades of XRP and the lack of human-placed bids and offers from exchange order books.
Coinbase has driven calls for more regulatory clarity in the United States, going as far as the court system in an effort to force the SEC to release clear guidelines for cryptocurrency industry participants.
Its filing for a mandamus petition to the federal government requesting that the SEC would provide “clarity on regulations regarding crypto” has been challenged by the agency, with an outcome not likely until the latter stages of 2023.
At this stage, it’s difficult to predict what the potential outcome will be for the likes of Cardano, Polygon, and Solana. Polygon, in particular, has become an important layer 2 scaling platform for Ethereum, increasing transaction processing and reducing fees for the ecosystem.
What is clear is the lack of certainty for the American cryptocurrency space, with the likes of Coinbase even looking at setting up shop in jurisdictions like the UAE, which has adopted a friendly regulatory attitude in an effort to establish itself as a haven for crypto companies.