Ripple VS SEC: Why The Market Is Celebrating

Key Takeaways

• A summary judgement was handed down in relation to SEC v. Ripple, a years-long case that many have speculated will influence how cryptocurrencies are regulated in the U.S.
• While the outcome was a split decision, most are interpreting it as a win for the crypto industry over the SEC. (Today’s strong market rally supports this view.)
• The judge ruled that, in certain circumstances, the sale of XRP tokens was not a security.
• They also ruled that XRP is a security when sold to institutional investors because it met the test for an investment contract under U.S. securities laws.
• Crucially, the judge refrained from ruling on whether secondary market sales of XRP were investment contracts.
• Both parties will likely appeal certain parts of the ruling that went against them.

Disclaimer: All information contained in this post is not to be considered financial advice of any kind, and you should obtain independent legal, financial, taxation and/or other professional advice in respect of any decision. You acknowledge that any information provided is generic in nature and does not take into account your specific circumstances.

Partial Win For Each Party

Today marked a significant development in SEC v. Ripple—a lawsuit that was filed in Dec. 2020—with the judge announcing a split decision after both sides filed a motion for summary judgment. Each party’s motion was partially granted and denied. In other words, the SEC and Ripple won some issues and lost some issues.

Despite the partial win for each side, most are interpreting today’s ruling as far more favourable for Ripple. That’s because the judge ruled that XRP (XRP) was not a security when sold to the broader public through exchanges.

In fact, the judge ruled that XRP was not inherently a security (page 15). Some viewed this as the most significant outcome from today’s ruling. For years, the SEC has argued that cryptocurrencies themselves are “the embodiment” of an investment contract (i.e. ’embodiment theory’). If the judge had agreed with this, crypto prices likely would’ve crashed.

The SEC’s main win was with regard to Ripple’s sale of XRP to institutional investors. The judge ruled that XRP, when sold in this manner, did meet the test for an investment contract because those buyers “would have understood that Ripple was pitching a speculative value proposition for XRP with potential profits.”

Implications From Today’s Ruling

XRP leads market rally, soars by 95%

Crypto prices rallied in the hours after the ruling. BTC rose to a 12-month high of $31,700. As for XRP, it soared by as much as 95% and Stellar (XLM)—which has ties to Ripple—increased by as much as 60%. This strong market response indicates that today’s ruling was a better-than-expected outcome for Ripple.

Also of note, altcoins that were recently alleged by the SEC as being securities—such as SOL, MATIC and ADA—have outperformed the market today. To me, this suggests that the market is more optimistic about the outcomes of SEC v. Binance and SEC v. Coinbase that relate to whether these particular cryptocurrencies are securities.

U.S. exchanges relist XRP

With the judge having ruled that XRP isn’t a security when sold to the general public, Coinbase promptly responded by relisting XRP, as did Kraken. Additionally, Gemini—another U.S.-based exchange—said it’s exploring the listing of XRP. (For context, after the SEC charged Ripple in Dec. 2020, some U.S.-based exchanges delisted XRP, causing its price to crash.)

Why this is of little relevance to other altcoins

I want to make this clear: Today’s ruling did not conclude whether cryptocurrencies are securities, and it was never going to.

The judge’s decision doesn’t appear to have any tangible or direct implications on the legal status of other cryptocurrencies. The judge made it clear that today’s ruling was applied based on the individual circumstances of the case. (As they note on page 14, even ordinary assets like gold, silver and sugar “may be sold as investment contracts, depending on the circumstances of those sales.”)

It’s crucial to understand footnote 16 of the ruling: “The Court does not address whether secondary market sales of XRP constitute offers and sales of investment contracts because that question is not properly before the Court. Whether a secondary market sale constitutes an offer or sale of an investment contract would depend on the totality of circumstances and the economic reality of that specific contract, transaction, or scheme.”

The ruling may set a soft precedent to the extent that it is (i) considered by lawmakers when debating proposed crypto legislation and (ii) referenced in other cases. (Even then, in these cases, lawyers could argue why the circumstances of SEC v. Ripple differ.)

Ultimately, while today’s ruling was an encouraging result for crypto at large, uncertainty over the legal status of cryptocurrencies in the U.S. can only disappear when relevant crypto legislation is passed. Until then, courts will keep ruling on a case-by-case basis.

Where to from here?

Both sides are likely to appeal parts of the ruling to the U.S. Court of Appeals for the Second Circuit. Should this happen, it will likely be many months until a ruling.

(Separately, the judge left the matter of whether certain Ripple executives are personally at fault for the institutional sale violation to a jury trial. A trial date will be announced soon. From a market perspective, this is irrelevant.)

Some industry participants, such as Justin Slaughter (Policy Director, Paradigm), suggest today’s ruling will make for an interesting few days in Washington, D.C. “The most consequential few days in crypto policy history,” he tweeted. “If there’s no movement towards bipartisan legislation now, there probably won’t be before the 2024 election.”

Responses From Ripple, SEC & Crypto Lawyers

From Ripple’s chief legal officer: “A huge win today – as a matter of law – XRP is not a security. Also a matter of law – sales on exchanges are not securities. Sales by executives are not securities. Other XRP distributions – to developers, to charities, to employees are not securities.”

From the SEC: “We are pleased that the court found that XRP tokens were offered and sold by Ripple as investment contracts in violation of the securities laws in certain circumstances. The court agreed with the SEC that the Howey Test governs the securities analysis of crypto transactions and rejected Ripple’s made-up test as to what constitutes an investment contract.”

For more qualified takes, here are the reactions of various crypto lawyers: Stephen Palley (Brown Rudnick), Marvin Ammori (Uniswap Labs), Justin Slaughter (Paradigm), Gabriel Shapiro (Delphi Labs), Mike Wawszczak (Alliance), Bill Hughes (Consensys), Preston Byrne (Brown Rudnick), James Murphy (MetaLawMan) and Marco Santori (Kraken).