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A federal judge ruled that Ripple Labs’ crypto token, XRP, is not a security when sold on digital-asset exchanges to the general public, but that Ripple’s sales to sophisticated institutional investors did qualify as an unregistered sale of investment contracts, in violation of federal law.
The question of whether cryptocurrencies are “securities” under federal law is of paramount importance to the industry, and the ruling that some sales of XRP qualify as securities transactions while others do not is a partial victory for embattled crypto enthusiasts.
The price of XRP
XRPUSD,
soared more than 60% following the ruling Thursday, according to FactSet.
Ripple CEO Brad Garlinghouse celebrated the news in a tweet.
The Securities and Exchange Commission sued Ripple Labs and Garlinghouse in 2020, alleging that XRP is a digital-asset security that they sold illegally without registering with the regulator.
Federal courts follow the so-called Howey test to determine whether a transaction is an investment contract and therefore a security subject to SEC oversight. Under this test, an investment contract is a transaction whereby a person invests money in a common enterprise and is led to expect profits through the efforts of others.
U.S. District Judge Analisa Torres wrote Thursday that Ripple’s sales of XRP to institutional buyers qualified as an investment contract under this test.
“Institutional buyers would have understood that Ripple was pitching a speculative value proposition for XRP with potential profits to be derived from Ripple’s entrepreneurial and managerial efforts,” she wrote.
Sales on exchanges, the judge said, are not securities because the buyers in these transactions didn’t know whether they were buying the token from Ripple or some other third party, and therefore they could not have had the expectation that their money would fund Ripple’s operations.
“An institutional buyer knowingly purchased XRP directly from Ripple pursuant to a contract, but the economic reality is that a [retail] buyer…did not know to whom or what it was paying its money.”
An SEC spokesperson told MarketWatch that it is continuing to review the decision but that it was “pleased that the court found that XRP tokens were offered and sold by Ripple as investment contracts in violation of securities laws in certain circumstances.”
Industry representatives hailed the decision as a victory for the crypto economy that could be a boon for digital asset exchanges Coinbase
COIN,
and Binance in their legal battles with the SEC.
“This fundamentally undercuts the SEC’s argument that it has the authority over these underlying assets and that regulatory clarity already exists,” said Sheila Warren, CEO of the Crypto Council for Innovation, an industry group representing Coinbase and venture capital firm Andreesen Horowitz.
“This is certainly a call to action to Congress and will light a fire under current proposals,” she added. “This is a significant thaw in the regulatory permafrost that the U.S. has been stuck in.”
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