Ripple Win Heralds Uptick for Crypto and Digital Assets

June 2024

The crypto world rejoiced this week as a judge in the Southern District of New York ruled that Ripple’s XRP token is, at least partly, not considered a security. The SEC had pursued legal action against Ripple since 2020, alleging that Ripple sold XRP as an ‘investment contract’ - a type of security, which would require registration with the SEC which Ripple did not have; Ripple has strenuously denied this allegation in various ways and now have been (partially) vindicated. 

Documentation of the court’s findings can be found here but in essence Ripple’s XRP offerings were examined in two different forms: Institutional Sales and Programmatic Sales. Institutional Sales are taken to be sales made to sophisticated individuals and entities such as investors and venture capitalists, whereas Programmatic Sales are taken to be sales made to public buyers on digital asset exchanges. 

In terms of Institutional Sales, the ruling didn’t go Ripple’s way, with the court rejecting arguments such as contract content and wording of contracts it had offered, and came to the following decision: 

  • “Therefore, having considered the economic reality and totality of circumstances surrounding the Institutional Sales, the Court concludes that Ripple’s Institutional Sales of XRP constituted the unregistered offer and sale of investment contracts in violation of Section 5 of the Securities Act.”

On the other hand, Programmatic Sales went the other way. Although the court found some of Ripple’s arguments unconvincing or inapplicable, it also found some of the SEC’s arguments lacking, stating that the assertion that Ripple “explicitly targeted speculators” or “ understood that people were speculating on XRP as an investment,” was not relevant as a buyer’s speculation did not constitute an investment contract as per the Securities Act. The judge also took issue with the SEC’s assumption that the general public would be able to understand and appreciate the content of the multitude and variety of documentation it provided as evidence for Ripple’s Investment Contracts. So, in this regard, the court ruled that: 

  • “Therefore, having considered the economic reality and totality of circumstances, the Court concludes that Ripple’s Programmatic Sales of XRP did not constitute the offer and sale of investment contracts.” 

Although this is a mixed result for Ripple, it’s a significant development in favor of crypto in the US and a blow for the SEC as can be seen in part of the statement: 

  • “Having considered the economic reality of the Programmatic Sales, the Court concludes that the undisputed record does not establish the third Howey prong. Whereas the Institutional Buyers reasonably expected that Ripple would use the capital it received from its sales to improve the XRP ecosystem and thereby increase the price of XRP, see Kik, 492 F. Supp. 3d at 180; cf. supra § II.B.1, Programmatic Buyers could not reasonably expect the same. Indeed, Ripple’s Programmatic Sales were blind bid/ask transactions, and Programmatic Buyers could not have known if their payments of money went to Ripple, or any other seller of XRP. Further, it is not enough for the SEC to argue that Ripple “explicitly targeted speculators” or that “Ripple understood that people were speculating on XRP as an investment,” SEC Mem. at 28, because a speculative motive “on the part of the purchaser or seller does not evidence the existence of an ‘investment contract’ within the meaning of the [Securities Act].”

The fact that sales of XRP were facilitated through digital asset exchanges as blind bid/ask transactions prohibits the view that those purchasing XRP would profit from the efforts of Ripple as users couldn’t know if they were buying the XRP from Ripple or not. This is highlighted in the document with the following statement: 

  • “It may certainly be the case that many Programmatic Buyers purchased XRP with an expectation of profit, but they did not derive that expectation from Ripple’s efforts (as opposed to other factors, such as general cryptocurrency market trends)—particularly because none of the Programmatic Buyers were aware that they were buying XRP from Ripple.”

This ruling therefore sets precedent for all other crypto companies who sell their tokens on digital asset exchanges using blind bid/ask systems. Under those circumstances, the SEC will not be able to claim that the tokens act as securities and need to comply with the Securities Act under the purview of the SEC, which may see the end of the SEC’s crusade against crypto.

Ripple celebrated with a tweet stating “XRP is not a security. This victory for  @Ripple  is a win for the entire industry and a step toward regulatory clarity in the U.S. A huge thank you to  @bgarlinghouse, @chrislarsensf, and @s_alderoty for their leadership and the #XRPCommunity for their continued support.”

A side effect of the ruling is the price of XRP has shot up, increasing by approximately 75% in the hours following the announcement (though that has dropped off slightly to approximately 50% over the pre-announcement price since) and had a similar, if not so pronounced, impact on other cryptocurrencies. This surge in cryptocurrencies is likely to continue as American buyers gain access to crypto and tokens as the SEC stranglehold lifts. 

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By Matthew Warner