The U.S. Securities and Exchange Commission logo adorns an office door at the SEC headquarters in Washington, June 24, 2011. REUTERS/Jonathan Ernst/File Photo/File Photo
July 13 (Reuters) – In a significant legal triumph for the cryptocurrency industry, Ripple Labs Inc has been cleared of violating federal securities law through the sale of its XRP token on public exchanges, as ruled by a U.S. judge on Thursday. This ruling has led to a surge in the value of XRP.
According to Refinitiv Eikon data, XRP witnessed a remarkable 75% increase by late afternoon on Thursday.
While this ruling represents the first win for a cryptocurrency company in a case brought by the U.S. Securities and Exchange Commission (SEC), it does provide a partial victory to the SEC as well.
Though this ruling is specific to the case at hand, it is expected to provide support to other crypto firms currently engaged in battles with the SEC over regulatory jurisdiction.
An SEC spokesperson expressed satisfaction with a portion of the ruling, stating that Ripple violated federal securities law by selling XRP directly to sophisticated investors.
Once a final judgment is issued or if permitted by the judge earlier, the ruling can be appealed.
Ripple Chief Executive Brad Garlinghouse described the ruling as “a huge win for Ripple, but more importantly for the industry overall in the U.S.”
Coinbase, the largest U.S. cryptocurrency exchange, announced the resumption of trading of XRP on its platform.
According to Coinbase Chief Legal Officer Paul Grewal, they have thoroughly examined Judge Torres’ considered decision and their analysis, leading them to the conclusion that it is now appropriate to relist.
WHEN CRYPTO IS NOT A SECURITY
The SEC had accused Ripple Labs and its current and former chief executives of conducting an unregistered securities offering worth $1.3 billion through the sale of XRP, which was created by Ripple’s founders in 2012.
This case has been closely monitored by the cryptocurrency industry, which disputes the SEC’s claim that the majority of crypto tokens are securities and subject to the regulator’s stringent investor protection rules. The SEC has initiated over 100 enforcement actions related to cryptocurrencies, alleging that various tokens are securities. However, many of these cases have been resolved through settlements.
In the few instances that have gone to court, judges have sided with the SEC, determining that the crypto assets in question were indeed securities. Unlike commodities, securities are subject to strict regulation, requiring issuers to register them with the SEC and provide detailed disclosures to inform investors about potential risks.
Judge Torres ruled that Ripple’s sale of XRP on public cryptocurrency exchanges did not constitute offers of securities under the law since buyers did not have a reasonable expectation of profit tied to Ripple’s efforts.
She characterized these transactions as “blind bid/ask transactions,” in which buyers were unaware of whether their payments went to Ripple or any other seller of XRP.
Torres utilized a legal precedent set by the U.S. Supreme Court, which established that an “investment of money in a common enterprise with profits to be derived exclusively from the efforts of others” constitutes an investment contract. This classification falls under the category of securities.
Torres also ruled that the sales of XRP on cryptocurrency platforms by Garlinghouse and co-founder and former CEO Chris Larsen, as well as other distributions including employee compensation, were not considered securities.
Brad Garlinghouse, chief executive officer of Ripple Labs Inc., Photographer: Kyle Grillot/Bloomberg© 2021 BLOOMBERG FINANCE LP
PARTIAL WIN FOR THE SEC
The SEC achieved a partial victory as Torres concluded that Ripple’s $728.9 million in XRP sales to hedge funds and other sophisticated buyers constituted unregistered sales of securities.
Torres ruled that Ripple’s marketing efforts targeted institutional investors, clearly indicating that the company was presenting a speculative value proposition for XRP, which relied on the company’s efforts to develop the blockchain infrastructure behind the digital asset.
She stated that a jury must determine whether Garlinghouse and Larsen aided the company’s violation of the law. She also noted that the defendants cannot argue at trial that they were not “fairly warned” that XRP was a cryptocurrency.
She stated that the SEC is not obligated by law to provide warnings to all potential violators on an individual or industry basis.
CALLS FOR LEGISLATION
According to Gary DeWaal, a legal expert from Katten Muchin Rosenman, the ruling is expected to provide support to Coinbase in its ongoing case against the SEC.
The market’s reaction to the ruling signifies a “tremendous event for the industry,” according to DeWaal.
Both the Ripple and Coinbase cases revolve around registration requirements and the determination of whether certain digital assets qualify as securities under U.S. law.
The cryptocurrency industry has called for legislation that establishes clear rules for tokens, and this ruling has sparked renewed calls for Congress to clarify the status of digital assets.
Tom Emmer, a Republican Majority Whip in the House of Representatives, stated in a tweet that the ruling confirmed that “a token is separate and distinct from an investment contract it may or may not be part of.”
“Now, let’s make it law,” he added.
Reporting by Jody Godoy and Chris Prentice in New York and Tom Hals in Wilmington, Delaware; Editing by Chizu Nomiyama, Conor Humphries, Leslie Adler, and David Gregorio