July 13 (Reuters) – In a groundbreaking ruling on Thursday, a U.S. judge declared that Ripple Labs Inc did not contravene federal securities law when it sold its XRP token on public exchanges. This legal triumph marks a major milestone for the cryptocurrency industry, resulting in a remarkable surge in the value of XRP.
According to Refinitiv Eikon data, XRP witnessed an impressive surge of 75% by late afternoon on Thursday.
The recent ruling by U.S. District Judge Analisa Torres marked a significant milestone as the first victory for a cryptocurrency company in a case initiated by the U.S. Securities and Exchange Commission (SEC). However, it is important to note that the ruling also granted the SEC a partial victory.
While the ruling’s applicability is limited to the particular circumstances of this case, it is expected to serve as a valuable precedent for other cryptocurrency firms engaged in disputes with the SEC regarding the jurisdictional scope of their products.
In response to the ruling, an SEC spokesperson expressed satisfaction with the portion of the decision in which the judge concluded that Ripple had violated federal securities law through the direct sale of XRP to sophisticated investors.
Once a final judgment is issued or upon the judge’s permission, there remains the possibility of appealing the ruling.
The SEC spokesperson stated that the regulator is currently reviewing the decision.
Ripple’s CEO, Brad Garlinghouse, hailed the ruling as “a significant victory for Ripple and, more importantly, for the broader industry within the United States.”
Coinbase, the largest cryptocurrency exchange in the U.S., announced that it would resume trading of XRP on its platform.
After careful consideration and review of Judge Torres’ insightful decision, Coinbase’s Chief Legal Officer, Paul Grewal, shared on Twitter, “We’ve examined our analysis thoroughly. It’s now time to relist.”
On Thursday, the stock of Coinbase surged, closing with a remarkable 24% increase at $107 per share.
WHEN CRYPTO IS NOT A SECURITY
The SEC had alleged that the company and its current and former chief executives conducted an unregistered securities offering worth $1.3 billion by selling XRP, a cryptocurrency created by Ripple’s founders in 2012.
The outcome of this case has been closely monitored in the cryptocurrency industry, which challenges the SEC’s assertion that the majority of crypto tokens are securities and subject to the agency’s stringent investor protection regulations. The SEC has initiated over 100 enforcement actions related to cryptocurrencies, claiming that numerous tokens qualify as securities. However, many of these cases have resulted in settlements.
In the few instances where litigation proceeded, judges have generally agreed with the SEC’s classification of the crypto assets as securities. Unlike commodities, securities face rigorous regulation and must be registered with the SEC by the issuer, accompanied by detailed disclosures to inform investors about potential risks.
Judge Torres determined that Ripple’s sales of XRP on public cryptocurrency exchanges did not qualify as offers of securities under the law. According to her ruling, purchasers did not have a reasonable expectation of profit tied to Ripple’s efforts during these “blind bid/ask transactions.” Buyers were unaware of whether their payments went directly to Ripple or any other XRP seller.
Torres applied a precedent set by the U.S. Supreme Court, which stated that an investment contract refers to “an investment of money in a common enterprise with profits to come solely from the efforts of others.”
Furthermore, Torres concluded that the sales of XRP on cryptocurrency platforms by Ripple CEO Brad Garlinghouse, co-founder and former CEO Chris Larsen, and other distributions, including employee compensation, did not involve securities.
PARTIAL WIN FOR THE SEC
In a partial victory for the SEC, Judge Torres determined that Ripple’s sales of XRP totaling $728.9 million to hedge funds and other sophisticated buyers were unregistered sales of securities.
Torres concluded that Ripple’s marketing efforts, specifically targeting institutional investors, clearly promoted a speculative value proposition for XRP. The success of XRP was portrayed as dependent on the company’s endeavors to develop the blockchain infrastructure supporting the digital asset.
Regarding the upcoming trial, Torres ruled that a jury should determine whether Ripple CEO Brad Garlinghouse and co-founder Chris Larsen facilitated the company’s violation of the law. Additionally, she stated that the defendants would not be permitted to argue during the trial that they lacked “fair notice” regarding XRP’s classification as a cryptocurrency.
“The law does not impose a requirement on the SEC to provide a warning to all potential violators on an individual or industry level,” Torres emphasized.
CALLS FOR LEGISLATION
Gary DeWaal, an attorney at Katten Muchin Rosenman, suggested that the ruling could support Coinbase in its own SEC case, offering them a stronger position.
The response from the market indicates that the ruling is viewed as a significant development for the industry, according to DeWaal.
Both the Ripple and Coinbase cases revolve around registration requirements and the determination of whether specific digital assets qualify as securities under U.S. law.
In light of this ruling, the cryptocurrency industry has renewed its call for legislative action to establish clear regulations for tokens. Many are urging Congress to provide clarification on the legal status of digital assets.
Representative Tom Emmer, a Republican and the Majority Whip of the House of Representatives, expressed in a Twitter post that the ruling confirmed that “a token is separate and distinct from an investment contract it may or may not be part of.” He called for enacting legislation to solidify this understanding.
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
