In a groundbreaking legal triumph for the cryptocurrency sector, a judge in the United States declared that Ripple Labs Inc did not contravene federal securities legislation by vending its XRP token through public exchanges.
This ruling propelled the value of XRP to surge, reaching a 75% increase by the late afternoon on Thursday.
Judge Analisa Torres of the U.S. District Court delivered the initial victory for a cryptocurrency company in a lawsuit instigated by the U.S. Securities and Exchange Commission (SEC), though the SEC also secured a partial triumph. While the verdict is specific to the circumstances of this case, it is anticipated to provide support to other cryptocurrency enterprises engaged in battles with the SEC to determine if their products are subject to the regulator’s authority.
An SEC spokesperson expressed contentment with a portion of the judgment where the judge found that Ripple violated federal securities law by directly vending XRP to sophisticated investors.
Upon the issuance of a final judgment or with the judge’s consent, it remains possible to challenge the ruling through an appeal. The SEC spokesperson mentioned that the regulator is currently scrutinizing the decision.
Brad Garlinghouse, the Chief Executive of Ripple, hailed the verdict as “a significant triumph for Ripple and, more importantly, for the overall industry within the United States” during an interview.
Coinbase, the largest cryptocurrency exchange in the U.S., announced that it would resume the trading of XRP on its platform.
“We have carefully assessed our analysis and taken into consideration Judge Torres’ insightful decision. It is now appropriate to relist,” tweeted Paul Grewal, the Chief Legal Officer of Coinbase.
It is worth noting that the SEC had accused Ripple, along with its current and former executives, of engaging in an unregistered securities offering worth $1.3 billion by selling XRP, a digital token created by Ripple’s founders in 2012.
The case has been closely monitored within the cryptocurrency industry, which contests the SEC’s assertion that the majority of crypto tokens qualify as securities and are subject to the agency’s stringent investor protection regulations. The SEC has initiated over 100 enforcement actions in the crypto sphere, claiming that various tokens are securities, but many of these cases have been settled.
In the few instances that have gone to court, judges have sided with the SEC, affirming that the crypto assets in question indeed constitute securities. Unlike commodities, securities are subject to strict regulations, necessitating registration with the SEC by the issuer and the provision of comprehensive disclosures to inform investors about potential risks.
Judge Torres ruled that the sale of XRP by Ripple on public cryptocurrency exchanges did not constitute offers of securities according to the law. She determined that purchasers did not have a reasonable expectation of profit tied to Ripple’s efforts. The transactions were described as “blind bid/ask transactions” where buyers were unaware if their payments went directly to Ripple or other XRP sellers.
Torres referred to a U.S. Supreme Court case, which defined “an investment of money in a common enterprise with profits to come solely from the efforts of others” as a specific type of security known as an investment contract.
The judge also ruled that the sales of XRP on cryptocurrency platforms by Ripple’s CEO Brad Garlinghouse, co-founder Chris Larsen, and other distributions including employee compensation, were not securities.
The SEC achieved a partial victory as Torres concluded that Ripple’s $728.9 million sales of XRP to hedge funds and other sophisticated buyers constituted unregistered sales of securities. Torres stated that Ripple’s marketing efforts targeting institutional investors clearly indicated a speculative value proposition for XRP, contingent on the company’s efforts to develop the underlying blockchain infrastructure.
Torres further noted that a jury must determine whether Garlinghouse and Larsen aided the company’s violation of the law, and she emphasized that the defendants cannot argue during the trial that they were not adequately informed that XRP was a cryptocurrency.
The ruling is expected to aid Coinbase in its own legal battle with the SEC, according to Gary DeWaal, an attorney at Katten Muchin Rosenman. The market’s reaction to the ruling signifies a significant event for the cryptocurrency industry, with calls intensifying for Congress to establish clear regulations for digital assets.
Tom Emmer, a Republican House of Representatives Majority Whip, expressed on Twitter that the ruling established the distinction between a token and an investment contract, emphasizing the need to transform it into law.