Judge Analisa Torres' decision that some cryptocurrency transactions do not count as securities sales gave Ripple Labs Inc. what appears to be a partial victory in the Securities and Exchange Commission's lawsuit against it, which substantially increased the price of cryptocurrencies. The SEC's assertion that the majority of digital assets are securities that must be registered—which is impossible to do under the current regulations—can be successfully contested, even though the district court's ruling is not legally binding elsewhere.
This has repercussions for other actions the agency takes against cryptocurrency exchanges and other middlemen. In December 2020, the SEC filed a lawsuit against Ripple, stating that the company's $1.3 billion in sales of the digital asset XRPXRP 0.0%XRP 0.0% since 2013 amounted to an unregistered securities offering.
The court ruled in a summary decision that the $757.6 million worth of XRP that Ripple offered to retail customers via programmatic sales was valid. Moreover, the court determined that using XRP to pay for employee salary and other services did not satisfy the requirements of an investment contract. "Whereas Institutional Buyers could have 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, programmatic Buyers could not have reasonably expected the same."
The original founding team gave Ripple 80 billion XRP units (of a 100 billion maximum) as compensation for their assistance in building the company's blockchain, the XRP ledger. Contrary to the more common practice of initial coin offerings, where a currency's developers sell it to investors, founding teams or decentralized organizations might nonetheless own large holdings.
The judge found that the $728.9 million in XRP that the company sold to institutional investors was an illegal offering, ruling that "Based on the totality of the 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." This prevented the ruling from being a complete victory for cryptocurrencies.
After the decision was made public, the value of all cryptocurrencies increased by almost 6% to $1.3 trillion, while XRP rose by 76% to 82 cents, ranking it as the fourth-largest digital asset, according to CoinGecko. Investors saw the decision favorably for the company's own battle with the SEC, which has accused it of operating as an unregistered securities market, and the stock price of the Coinbase exchange increased by about 20%. It's interesting to note that when the Ripple lawsuit was revealed in 2020, the exchange really stopped dealing XRP.
The decision made today does not, however, automatically give exchanges the green light. When considering the ability of this decision to set a precedent for other instances, Stephen Palley, a partner at Brown Rudnick and co-chair of the digital commerce practice, told Forbes that there is some significant nuance that needs to be taken into account. "The court says in a footnote that it is not ruling on whether or not secondary transactions are securities transactions," remarked Palley. "It stated that a user of these platforms, or crypto exchanges, would not be able to determine that Ripple is on the other side. As a result, the court came to the conclusion that there could not have been a profit expectation based on Ripple's efforts.
Palley wonders if this reasoning will make it more difficult for other courts to claim that secondary sales are investment contracts in the future. "I don't understand how you can say that transactions between two non-Ripple parties would be securities transactions but transactions where Ripple was on one side wouldn't,"