Ripple Secures Partial Win in SEC Court Fight Over XRP
A U.S. District judge ruled on Thursday that XRP is not a security when traded on public exchanges, potentially paving the way to a more favorable legal climate for cryptocurrencies.
Court ruling lands a favorable win for Ripple and the crypto space
Ripple Labs, the company behind the embattled XRP payment protocol, scored a partial win in the SEC legal battle after a federal judge ruled that XRP is not a security when sold to retail investors.
The Securities Exchange Commission (SEC), known for its hostile crypto stance, first charged Ripple in December 2020, accusing the firm of breaching securities laws. The financial watchdog also attempted to categorize 12 popular crypto tokens as securities, including the XRP, which, if passed into law, would make them subject to SEC scrutiny and classify U.S. crypto exchanges as unregistered securities brokers.
On Thursday, however, U.S. District Judge Analisa Torres drew a line between sales to institutional investors and retail buyers. According to Torres, while XRP is not a security when purchased by individuals, it is when purchased by investment funds and financial institutions. To assess whether a transaction qualifies as an investment contract, the federal judge used the Howey Test, a legal standard that highlights four elements, or prongs, to be considered when reviewing the financial transaction: (1) an investment of money, (2) in a common enterprise, (3) with the expectation of profit, or (4) to be derived from the efforts of others.
"A reasonable investor, situated in the position of the Institutional Buyers, would have been aware of Ripple's marketing campaign and public statements connecting XRP’s price to its own efforts," wrote Torres. Retailers, on the other hand, are "generally less sophisticated" and should not be expected to have "similar 'understandings and expectations'" of Ripple and XRP, said Torres.
As a result, Judge Torres found that Ripple violated securities law when it sold XRP to institutional investors but not when it sold XRP on public exchanges. While there could be further appeals by the SEC, the verdict on Thursday represents a watershed moment for the broader crypto industry. It may contribute to a more favorable regulatory landscape for cryptocurrencies. It could also benefit Web3 games by attracting more players and investors into the ecosystem. Clearer regulations may also provide developers and gaming firms with more confidence and certainty when integrating crypto or blockchain tech into their games.