Ripple's legal victory could pave the way for regulatory clarity and compliance in the crypto market, but critics expect SEC to appeal this ruling.
Ladies and gentlemen, we did it.
Crypto finally won a court case against the SEC! Well, partially, at least.
You can consider Ripple a winner by decision after one was finally made by the Southern District of New York (SDNY):
How exactly did Ripple win its court case? What does this mean for crypto? And will this victory stand the test of time (and a possible appeal)?
This analysis answers all of that and more.
Ripple vs SEC ─ What Was at Stake?
But what does that actually mean?
Well, if XRP was a security, it would mean the SEC could litigate against all the exchanges listing it for trading. Because remember:
Put simply, that lawsuit was a biiiig deal. If XRP = security, then bad for crypto. If XRP = no security, then good for crypto.
Is XRP a Security? No, But…
You noticed there’s a but included in this ruling.
That is because the court case decided whether XRP is a security on several accounts.
Here is a quick refresher on what makes up a security:
- An investment of money;
- In a common enterprise;
- With the expectation of profit;
- To be derived from the efforts of others.
The case ruled on whether XRP is a security in:
- Institutional sales to hedge funds and VCs
- Programmatic sales to retail directly on exchanges
- “As a form of payment for services”
You may be wondering: why are there three categories where a token can be a security?
Well, that is the confusing part about this ruling. The SDNY decided:
- XRP is a security when it is sold to institutions.
- XRP is not a security when it is sold to exchanges or used as a form of payment for employees and contributors.
Let’s unpack this bit.
XRP can sometimes be a security and sometimes not, depending on the circumstances of investment:
It is a security when sold to institutions because these are aware of the efforts the company behind the token - in this case, Ripple Labs - puts into developing the product. By extension, developing the product means the token's price goes up, which is why private sale investors buy in the first place.
The court argued that on an exchange, the buyer doesn’t know who is on the other side of the trade:
Importantly, it also notes that even if Ripple was selling these tokens in a programmatic way, this would not make XRP a security:
In other words, the court is saying that smart money is smart and retail money is not. We cannot expect retail money to think rationally and expect Ripple Labs to raise the value of their token:
The bottom line:
- XRP is a security if sold at scale in private to investors.
- But it is not a security when it is traded on exchanges.
- Overall, it is more non-security than security.
How the Crypto Industry Reacted
Take a wild guess what this favorable ruling meant for XRP and crypto…
XRP on a moon mission:
Coinbase relists XRP for trading since it’s not a security:
Most importantly, this could have profound implications for other coins…
What This Could Mean for Altcoins
The SEC has been going hard after the crypto industry in the last few months.
Particularly interesting is the distinction the judge made between when a token is and is not a security. For future altcoin launches, this would mean they are in full compliance with the law as long as they do not offer institutional investors big bags before everyone else:
Moreover, this put a dent in the armor of the SEC and blazes the trail for future court decisions to potentially side with crypto companies:
Could this ruling be overturned?
Is the Decision Final? Not So Fast…
“The legal status of XRP, then, seems to possess a kind of quantized duality, Schrodinger’s Shitcoin, if you will.I t’s a security when sold to an institutional investor in a primary sale, but not a security when sold behind the anonymity of a cryptocurrency exchange, or when sold in exchange for services to insiders… This position strikes me as deeply unsatisfactory from the standpoint of regulatory consistency. No other security magically transmogrifies from a security to a non-security after it is sold more than once.”
From a layman’s point of view, this sounds intuitively right. Surely, a token either is a security or it isn’t?
Byrne isn’t the only one expecting the SEC to appeal this ruling. Here is another opinion:
Still, Slaughter argues that a conservative Supreme Court would eventually slap down the SEC’s appeal since Gensler, a Democrat, is leading the agency.
And then you have House Democrats potentially turning on Gensler after the ruling:
A clear win on points for Ripple and the crypto industry.
To be continued…