The lengthy lawsuit between Ripple Labs and the Securities and Exchange Commission (SEC) has finally concluded, resulting in a mixed verdict that has alleviated some of the burdens on the cryptocurrency market.
The SEC had accused Ripple Labs, along with its founders Bradley Garlinghouse and Christian Larsen, of unlawfully selling securities through the XRP tokens without proper authorization.
Following a three-year trial, the New York County Court reached a noteworthy decision that, while partially upholding the lawsuit, has been celebrated as a victory by Ripple. Moreover, it is expected to bring about significant changes in the crypto market. The court ruled that, under specific circumstances, the sale of XRP tokens constitutes illegal securities trading, but not in all cases. This decision provides much-needed clarity regarding when the trading of a cryptocurrency violates the Securities Act.
The court differentiated between two types of XRP token sales: direct sales by Ripple Labs to institutional investors and trading on exchanges. While the former is considered a violation of securities law, the latter is not.
When Ripple Labs sold XRP tokens to institutional investors, it created an expectation that these investors would profit from Ripple’s efforts—a classic definition of a security. Ripple Labs’ continuous efforts to enhance the “XRP Ledger” and attract partners support this notion.
However, when it comes to trading tokens on exchanges, the situation is different. Ripple Labs was aware that buyers used XRP for investment purposes, and the company even aimed to increase speculative volume. Nevertheless, buyers could not be certain whether the money they paid for the tokens went directly to Ripple. Since Ripple only accounted for less than one percent of the total volume on exchanges, the likelihood of this was quite low. Consequently, purchasing XRP tokens on exchanges does not constitute an investment in Ripple Labs and does not violate the Securities Act.
The court’s verdict provides a clear answer to the question of when a token can be considered a security: when the investors’ funds directly flow into an organization.
As a result, a significant number of cryptocurrencies that the SEC sought to regulate as securities are now exempted. Many of these cryptocurrencies can now hope to avoid classification as securities.
The market reacted swiftly to this news, with substantial price gains. XRP experienced the most significant surge, doubling in value within a day. Ethereum, BNB, Cardano, Solana, Polygon, and other coins that were previously suspected of being securities also saw price increases of over 30 percent in some cases.
However, it is crucial to avoid misconstruing the judgment. It does not imply that the initial coin offering (ICO) conducted by the Ethereum Foundation is not an illegal securities trade. On the contrary, it is likely to be considered as such. Similarly, in the cases of Polygon, Cardano, and numerous other coins, a significant portion of the tokens were directly sold to investors by the issuers. Therefore, this is likely to be deemed illegal securities trading in light of the court’s decision. However, this affects only the issuers and not the tokens themselves. The tokens will continue to be traded on exchanges without the need for registration as securities. The feared stock market collapse, should the SEC have prevailed, is currently not a concern.
The US exchange Coinbase promptly responded to the verdict. It had previously suspended XRP trading due to concerns about facilitating illegal securities trading but resumed trading a few hours after the decision. Ripple is optimistic that the ruling will encourage banks and other financial institutions in the US to utilize XRP tokens for cross-border transactions, expecting discussions with multiple institutions about Ripple’s products in the near future.
Other players and companies in the crypto industry are also celebrating the verdict. For instance, Tyler Winklevoss of Gemini, like many other prominent crypto figures, is facing a trial with the SEC. He views this decision as evidence that the SEC is a “failed institution” and asserts that they overlooked Celsius and suffered significant losses in the Ripple case.
Although the ruling may permit financial institutions to use XRP tokens, the reasons why they should do so remain as uncertain as ever. While XRP may not be classified as a security, it still remains one of the most questionable coins in existence. Some even consider Ripple to be the epitome of a “shitcoin.”
Despite the controversy, Ripple has played a constructive role in the crypto market through this legal process. If XRP is not considered a security, then it is unlikely that any other coin would be classified as one.