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The cryptocurrency industry is having a great time as Ripple emerges as the victor in its court battle with US regulators when a federal judge ruled on Thursday that the sale of its digital asset on public exchanges complied with securities laws. This early dismissal of some regulatory allegations regarding the sale of over $1.4 bln worth of XRP has the market euphoric.
For years, the US Securities and Exchange Commission (SEC) has argued that digital assets constitute securities and should be subject to the same strict regulations as stocks. Last month, the regulator sued two of the largest crypto exchanges, Binance and Coinbase, accusing them of marketing unregistered securities to the public. And in its lawsuits against crypto companies, SEC named several tokens like MATIC, SOL, and ADA.
Recently, a top SEC official also said the industry has “an ethos built around non-compliance.”
But Thursday's ruling has provided the crypto industry with the arguments to defend itself in court. Ripple's chief legal officer, Stuart Alderoty, called the ruling “a win for the broader crypto industry.”
“Today's decision puts appropriate checks and balances on the SEC's campaign of regulation by enforcement,” Alderoty said in an interview.
Founded in 2012, Ripple's mission has been to make global payments easier using its native token XRP. Over the years, the token became one of the most valuable cryptocurrencies, only for the SEC to sue the company, which resulted in some exchanges delisting XRP. As a result, during the bull market of 2021, XRP didn't manage to hit a new high.
The SEC sued San Francisco-based Ripple in December 2020, accusing the firm and its co-founder, Chris Larsen, and CEO, Brad Garlinghouse, of misleading investors and violating securities laws in one of the first major legal fights involving cryptocurrencies. The agency alleged that the company's XRP sales constituted an unregistered securities offering.
Ruling in Ripple vs. SEC
In the 34-page ruling on Thursday, that court found that Ripple did not break the law when the digital asset created to facilitate cross-border payments was sold on public exchanges.
However, the Judge Analisa Torres of the US District Court for the Southern District of New York did find Ripple to be in violation of securities law when it sold XRP to institutional investors, like sophisticated hedge funds.
Torres ruled that there was no evidence retail could parse the many statements made by Ripple about XRP. Additionally, many statements cited by the SEC may not even have been shared with the broader public.
The court disagreed with the SEC's argument as to why XRP was a security, citing the Supreme Court's “Howey test.” As per the court, the secondary-market buyers were never promised anything by Ripple itself. Torres further noted that in over 75 years of securities law jurisprudence after Howey, “courts have found the existence of an investment contract even in the absence of Defendants' essential ingredients.”
In the summary judgment, it was determined by the court that the $757.6 million of XRP tokens that the company sold in programmatic sales to retail buyers as well as the use of the digital token as payment for employee wages and other services, did not meet the criteria of an investment contract. However, this does not cover the 80 billion XRP tokens out of the total supply of 100 billion that Ripple's founding team gave to Ripple Labs to develop the blockchain.
This is because “the Institutional Buyers 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 reasonably expect the same,” it said.
With the judge determining that the $728.9 million of XRP sold by the company to institutional investors is an illicit offering, the ruling fell short of a complete victory for Ripple and the crypto industry.
According to the ruling, reasonable investors or institutional buyers would have purchased the crypto asset expecting to derive profits from the company's efforts. After all, unlike retail, Judge Torres said, institutional buyers would have understood that the crypto company was “pitching a speculative value proposition for XRP with potential profits to be derived from Ripple's entrepreneurial and managerial efforts.”
A Partial Victory
This was a partial victory for Ripple Labs. The ruling does not mean that the crypto industry will win its other cases, as the judges handling Binance, Coinbase, and other SEC actions against crypto-related companies aren't necessarily bound by yesterday's judgment.
Moreover, the ruling by Judge Torres does not set a precedent, rather may only serve as persuasive commentary for future courts to follow if they so choose. They will have to make separate determinations where the SEC argued that a wide slate of cryptocurrencies constitute securities.
While the district court decision isn't binding elsewhere, it does indicate that the SEC's insistence that most digital assets are securities that should be registered can be successfully challenged. In this way, the ruling has implications for other actions taken by the US securities regulator against several crypto companies.
According to Stephen Palley, co-chair of digital commerce practice, this ruling isn't whether or not secondary transactions are securities transactions. Because there was no way for somebody using these crypto exchanges to know that Ripple was on the other side, the court concluded that there couldn't have been an expectation of profit based on Ripple's efforts.
“I don't see how you can conclude that a transaction where Ripple was on one side wouldn't be securities transactions, but transactions between two non-Ripple parties would be,” said Palley. It is expected that this ruling will be appealed by the SEC and reach the Supreme Court, where the ruling by Judge Torres could get overturned.
The market, however, for now, is looking at the bright side, seeing it as a positive decision for the digital asset industry, with the court concluding that XRP is not a security.
But Still a Big Win
For the most part, the crypto industry hails it as a big win for the crypto market.
Tyler Winklevoss, one of the founders of the crypto exchange Gemini, tweeted, “Adios” to SEC Chairman Gary Gensler, who has spearheaded the government's crackdown on the crypto industry. According to him, the ruling is favorable to Coinbase and “decimates” the SEC's case against the trading platform.
A similar opinion is shared by Bloomberg Intelligence's senior analyst for litigation, Elliott Stein. He noted that the ruling states that direct sales of crypto by an issuer are considered securities, but sales on the secondary market are unlikely to be deemed securities. Stein emphasizes that this “is a key argument in Coinbase's defense against the SEC.”
Meanwhile, Tyler's twin brother, Cameron Winklevoss, referred to the ruling as a “watershed moment” for the crypto industry that will make it difficult for the regulator to claim authority over cryptocurrencies.
The investment bank Bernstein called the ruling a landmark judgment for crypto. In a research report, the bank noted that the ruling is a “major relief for all tokens sold on secondary platforms while reducing the security overhang on those that are sold on exchanges. It further stated that the court's decision emphasizes the need for a separate digital assets framework, which “weakens” the SEC's stance that “the securities law is clear and no separate clarity is required for digital assets.”
The judgment significantly shifts the “regulatory cloud over the crypto industry,” wrote analysts led by Gautam Chhugani, adding, expects institutional investors who have stayed clear of crypto due to regulatory challenges may now reconsider the asset class.
Meanwhile, others who see this as a huge win for crypto say those accused of listing potential securities may now be in the clear, at least when it comes to the general public buying on their exchanges. Also, the decision further narrows the SEC's jurisdiction over the crypto market. But more importantly, with Thursday's ruling, pre-funding might be done, and venture capitalists will have to buy on the open market the same as the retail.
Paradigm policy director and former SEC adviser Justin Slaughter took to Twitter to state that “the odds are even if they (SEC) win at the appellate level, they'll lose at the Supreme Court.” This is because the supreme court “has been very hostile to a bunch of agencies recently… I don't expect them to miss a chance to cite a Democratic judge to thwack a major agency,” he explained on Twitter. As per Slaughter, this ruling “measurably increases” the chances of crypto legislation getting passed this year.
It's been after a long time that the crypto market is consistently seeing a barrage of positive news, which is creating a bullish momentum for the space.
XRP Kicking off Altcoin Season?
This is just the latest big positive news for the crypto market, which has been making a nice recovery after several failures last year. In recent weeks, we have had a number of filings for spot Bitcoin ETFs in the US, driven by the asset manager giant BlackRock Inc, which has brought back bullish sentiments in the market.
Now, with this win, the market experienced even more euphoria that sent the XRP price skywards. As XRP almost doubled in value and surpassed $0.90, BNB became the 4th largest cryptocurrency with a market cap of $41.84 billion.
Since rallying to a high of almost $0.95, XRP has given off some of its gains as it now trades at $0.79. Trading volume for the crypto asset also surged by 2,158% from a day ago to $13.9 billion.
As XRP started gaining traction, the trading volume of XRP against the Korean won (KRW) hit $2.5 billion on the largest South Korean exchange, Upbit, accounting for 50% of the platform's total trading volume. These rising volumes for digital asset shows a speculative frenzy.
Moreover, XRP price nearly doubled in value and had shorts losing $33 million, as per data from Coinglass. Bybit traders saw the most liquidations at $21 million, followed by OKX at $14 million and Binance at $14 million.
With the latest price action, XRP is now up 146.2% over the past year and 126.5% year-to-date (YTD). Still, the altcoin is down 77.24% from its all-time high of $3.40 hit in Jan. 2018.
As XRP spiked in value, Uphold, one of the few crypto exchanges where investors can purchase XRP, experienced internment issues “due to high demand,” as per its Twitter account.
The enthusiasm in the market has propelled other cryptocurrency's prices higher as well. As of writing, Bitcoin is trading at $31,205, up about 90% in 2023 so far. But while BTC jumped 2% in the past 24 hours, altcoins saw an even bigger increase in their value. This has the crypto king's dominance falling by 2.6% to 50.14%. Crypto traders and altcoins believe that an alt season might now be upon us.
With 5.7% gains during the same period, Ether is now exchanging hands at $1,990 after hitting $2,020 on Thursday.
With XRP's win, the coins that were also called securities by the SEC also gained significantly. Among the prominent gainers these past 24 hours have been Stellar (51%), Solana (30%), Lido (26%), Cardano (23%), Avalanche (18.6%), Pepe (17.6%), Polygon (17.6%), ApeCoin (16.6%), and LINK (13%). These greens have resulted in the total crypto market cap increasing by 6.6% to $1.3 trillion while managing $92.27 bln in trading volume.
Despite the rising prices this year, liquidity has been low, but it is steadily improving, especially in major crypto assets. Crypto assets are now trading near or above levels they plummeted to when the FTX exchange collapsed last November.
The rally was experienced by the broad crypto space with Michael Saylor's MicroStrategy, which owns 0.78% of all Bitcoin supply, jumped more than 10% and is currently trading at $461.83, up from $145 at the beginning of 2023. Similarly, crypto miner Marathon Digital surged over 14%.
According to pro-XRP lawyer John Deaton, Coinbase was the other “winner” from the ruling, and altcoins stand to benefit. The stock price of Coinbase spiked by almost 20% as investors saw the ruling as bullish for the exchange's own fight against the SEC. As of writing, COIN shares are trading at $105.27, down a bit from $109.2 yesterday but up from $50.5 from mid-June and $32.5 at the beginning of the year.
Interestingly, the exchange actually dropped the trading of XRP over two years ago when the Ripple suit was announced.
Now, Coinbase, along with Kraken, Crypto.com, Bitstamp, and iTrustShares, has relisted XRP on their respective platforms following the decision, which further boosted XRP prices. Gemini, meanwhile, is still in review mode regarding the relisting.
It is not over yet!
As the crypto market rejoiced, the SEC hit back with a statement of its own. The agency is reviewing the decision, said a spokesman for 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,” the regulator said in a statement.
Meanwhile, Ripple Chief Executive Brad Garlinghouse called the ruling “a huge win for Ripple but more importantly for the industry overall in the US.”
At this time, the company is also shifting its sights on the tokenized assets market, which it believes could be a $16 trillion business opportunity by 2030. To capture this massive opportunity, Ripple has started building tools to tokenize assets and facilitate their trading.
Earlier this month, Ripple's CBDC advisor Anthony Welfare also said that the company is working on a real-world use case for a stablecoin or CBDC on Ripple's CBDC Platform, which will enable its users to tokenize real estate as collateral for loans. Recently, the company also collaborated with the Hong Kong Monetary Authority (HKMA) on a pilot to tokenize real estate assets.
While the company continues to work towards its future development, for now, everyone is focused on this legal victory that is seen as a significant blow to the regulators' “war on crypto.” But it still isn't a definitive victory for the crypto industry, as the Ripple case is far from over and is set to get its own trial date in due course.
Gaurav started trading cryptocurrencies in 2017 and has fallen in love with the crypto space ever since. His interest in everything crypto turned him into a writer specializing in cryptocurrencies and blockchain. Soon he found himself working with crypto companies and media outlets. He is also a big-time Batman fan.