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As Ripple celebrates its victory in court over the US Securities and Exchange Commission (SEC), legal observers caution that regulatory clarity — although getting closer — is still a long way to go.
Last week, a US District Court judge found that Ripple did not violate federal securities law by selling its XRP token on public exchanges.
In a 34-page judgment, Judge Analisa Torres concluded that when XRP was sold “programmatically” to the public via crypto exchanges, it did not meet the criteria of a securities sale.
“Ripple’s XRP sales on these digital asset exchanges were blind bid/ask transactions,” Torres wrote in the judgment.
“Ripple did not know who was buying the XRP, and the purchasers did not know who was selling it.”
From 2013 to December 2020, when the lawsuit was originally filed, the SEC alleged that Ripple sold approximately $757m in XRP through programmatic sales.
Also referred to as sales “through the use of trading algorithms”, the SEC alleged that Ripple used the proceeds of these sales to fund its operations.
Ripple did not dispute either the amount raised by the sales or their use to fund its operations, and did not dispute the SEC’s claim that Ripple had not registered XRP as a security.
“XRP is not a security,” Ripple said in a statement announcing the judgment. “This victory for Ripple is a win for the entire industry and a step toward regulatory clarity in the US.”
Brad Garlinghouse, CEO of Ripple, issued a similar statement: “We said in December 2020 that we were on the right side of the law, and will be on the right side of history.
“We are thankful to everyone who helped us get to today’s decision — one that is for all crypto innovation in the US.”
Swerving the Howey test through 'programmatic' selling
As noted by Garlinghouse, the "most important" line in the ruling can be found on page 15, where Judge Torres argues that XRP’s legal status under securities laws is distinct from the manner in which it is sold.
“XRP, as a digital token, is not in and of itself a ‘contract, transaction, or scheme’ that embodies the Howey requirements of an investment contract,” she wrote.
Stuart Alderoty, chief legal officer at Ripple, also drew attention to this line in his public commentary on the judgment.
“A huge win today,” said Alderoty. “As a matter of law, XRP is not a security. Also as a matter of law, sales on exchanges are not securities.”
Coinbase, which is also being sued by the SEC on charges of selling unregistered securities, described the judgment as a “win” for the crypto industry.
“Win for Ripple. Win for the industry. Win for the builders. Win for a clear rulebook. Win for updating the system,” it said.
Coinbase added that it has now re-listed the XRP token, having previously delisted it in January 2021 when the SEC’s lawsuit was filed against Ripple.
Not quite a clean sweep for Ripple
Despite the celebrations, there was one element of the judgment that did not go in Ripple’s favour.
With regard to sales of XRP to institutional buyers, the judge took the view that these sales, which were based on written contracts, constitute securities sales.
According to the SEC, Ripple sold approximately $729m of XRP directly to institutional buyers — primarily institutional investors, hedge funds and customers of Ripple’s On-Demand Liquidity (ODL) service.
“Based on the totality of circumstances, the Court finds that reasonable investors, situated in the position of the Institutional Buyers, would have purchased XRP with the expectation that they would derive profits from Ripple’s efforts,” the judge wrote.
“From Ripple’s communications, marketing campaign, and the nature of the Institutional Sales, reasonable investors would understand that Ripple would use the capital received from its Institutional Sales to improve the market for XRP and develop uses for the XRP Ledger, thereby increasing the value of XRP.”
In short, the court found that Ripple’s sales of XRP to institutional buyers met all four criteria of the Howey test, namely:
- An investment of money.
- In a common enterprise.
- A reasonable expectation of profit.
- Derived from the efforts of others.
Industry reception
Legal observers were similarly upbeat about the verdict. Jason Gottlieb, chair and partner at law firm Morrison Cohen, said the judgment is “very, very good” for crypto, but still leaves the industry a long way from regulatory clarity.
“Headache-inducing questions remain,” he said. “Does a token that was part of an institutional sale carry that ‘securities-scheme-ness’ in a subsequent sale?
“If it's fungible with a token that came from a programmatic sale, is one sale a securities sale and one not?”
Gottlieb pointed out that the court “punted” as to the question of whether secondary market sales — i.e. sales from one member of the public to another following a sale from Ripple to the public — would constitute securities sales.
However, in Gottlieb’s view, the implication of the ruling is that the answer would be no. This, he also suggested, is why Coinbase re-listed XRP as soon as the ruling was published.
“While lots of thorny questions remain, the initial jubilation over the decision is justified,” he said. “Its logic both opens up clearer pathways to token distribution and secondary market trading that the SEC was systematically trying to shut down.”
Steve Gatti, a partner at Clifford Chance, agreed with this assessment, noting that the judgment should put “significant pressure” on the SEC’s argument that secondary sales on public exchanges are securities transactions.
However, in their “caveats” to the industry, both Gottlieb and Gatti warned that this particular judgment is just one decision from one district court judge, and is not a binding precedent.
Gottlieb said he hopes that other courts will adopt the decision, and Gatti said that this is likely given the court’s jurisdiction in the Southern District of New York (SDNY) — the home of Wall Street and an “influential” jurisdiction in financial matters.
