The Ripple Effect: A Landmark Ruling in the US Crypto Securities Debate
By Michael Turner
- July 16, 2023
In a significant legal ruling on Thursday, the long-standing debate in the crypto world regarding the classification of securities received a promising development for retail-facing projects. The three-year court battle between Ripple Labs and the Securities and Exchange Commission (SEC) took a crucial turn when a federal judge declared that Ripple’s XRP token was indeed a security when sold to institutional investors in the past, but not to the general public.
US District Judge Analisa Torres based her decision on the understanding that institutional investors were more informed about the securities-like characteristics of XRP during Ripple’s pitch to them. On the other hand, retail traders who bought XRP directly on crypto exchanges were not as aware of these aspects. This ruling is seen as a potential win for both Ripple and the SEC, as it adds weight to the ongoing security-or-not debate on both sides.
However, extrapolating this ruling to the entire crypto market is not straightforward. The court’s decision was based on the state of knowledge among retail investors years ago, during a time when Bitcoin’s value was considerably lower, and regulators were just forming their opinions on the crypto space. The landscape has since evolved significantly.
Could the SEC address this issue by providing clear guidelines on what constitutes a security moving forward? Possibly. The SEC has employed this approach in several lawsuits against crypto companies like Binance, Coinbase, and Gemini, where they identified tokens like MATIC and ALGO as potential securities. Nonetheless, the court disagreed with many aspects of the SEC’s argument and cited the Supreme Court’s “Howey test.” For instance, Ripple never promised anything to secondary-market buyers, a distinction shared by most exchange-traded instruments.
Some may interpret this early ruling as a potential relief for platforms like Coinbase, which have been accused of listing potential securities. The ruling suggests that such platforms may be in the clear, at least concerning the general public’s buying activities. However, this is only one facet of the situation.
Numerous successful crypto projects rely on early token sales to institutional investors and venture capitalists before their public launch, often registering these efforts with regulators to avoid any potential repercussions. Many of the tokens listed as possible securities by the SEC had undergone such pre-funding arrangements, and the SEC cited these examples to justify its oversight. The ruling implies that this form of pre-funding might become obsolete, unless venture capitalists are willing to engage in open-market purchases subject to the same volatility as everyone else.
It is worth noting that the SEC’s engagements with the crypto world continue to grow. The watchdog, along with three other authorities, recently filed charges against the bankrupt crypto lender Celsius and its former CEO Alex Mashinsky. Additionally, the SEC faces an array of court hearings and trials related to complaints against exchanges like Binance and FTX. The Ripple case is far from over, as it is yet to receive its own trial date. Despite soaring crypto prices, the sector remains uncertain and faces ongoing concerns.
