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?
The Ripple lawsuit is one for the crypto vets. It began over two years ago, with the SEC claiming XRP to be a security and it should thus have jurisdiction over how and where it can be traded:
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:
If tokens are securities, they are de facto investment contracts, and there is still no regulatory framework for how to trade those in the US.
Put simply, that lawsuit was a biiiig deal. If XRP = security, then bad for crypto. If XRP = no security, then good for crypto.
And Analisa Torres, the judge ruled that XRP is not a security - for the most part.
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.
Bottom line: Institutions know why they are investing, hence selling to them makes XRP a security.
BUT!
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:
That actually squares very much with investor behavior in the real world, where investors ape into tokens with little to no research. Finally, paying the team or other contributors in tokens also does not make XRP a security because XRP is not money
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.
Read: Delistings, Lawsuits and Unregistered Securities: How SEC's Actions Are Impacting Crypto
But altcoins like SOL, MATIC, ADA and many others won on this ruling by extension. Similar to XRP, they are developed by teams that are very much public. However, if the SEC is eventually found to have no jurisdiction over those, it would give altcoins the regulatory clarity to launch in a manner that is compliant with the law:
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:
But. There is one big but that needs to be addressed.
Could this ruling be overturned?
Is the Decision Final? Not So Fast…
Yes, it could.
In fact, as Preston Byrne argues on CoinDesk, it should be overturned:
“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:
This does not mean the SEC will not try to hit back. According to its own Twitter statement, it’s monitoring the situation. But experts are divided on whether another court would rule in favor of or against this ruling.
Conclusion
A clear win on points for Ripple and the crypto industry.
But another fight is likely. Whether the judges will be as kind to crypto remains unclear. If anything, now would be a good time to push crypto legislation through Congress.
To be continued…
This article contains links to third-party websites or other content for information purposes only (“Third-Party Sites”). The Third-Party Sites are not under the control of CoinMarketCap, and CoinMarketCap is not responsible for the content of any Third-Party Site, including without limitation any link contained in a Third-Party Site, or any changes or updates to a Third-Party Site. CoinMarketCap is providing these links to you only as a convenience, and the inclusion of any link does not imply endorsement, approval or recommendation by CoinMarketCap of the site or any association with its operators. This article is intended to be used and must be used for informational purposes only. It is important to do your own research and analysis before making any material decisions related to any of the products or services described. This article is not intended as, and shall not be construed as, financial advice. The views and opinions expressed in this article are the author’s [company’s] own and do not necessarily reflect those of CoinMarketCap. CoinMarketCap is not responsible for the success or authenticity of any project, we aim to act as a neutral informational resource for end-users.
