Ripple Labs Inc has received a groundbreaking legal triumph as a U.S. judge ruled on Thursday that the company did not violate federal securities law by selling its XRP token on public exchanges. This landmark victory has had a significant impact on the cryptocurrency industry, leading to a surge in the value of XRP. The ruling by U.S. District Judge Analisa Torres marks the first successful outcome for a cryptocurrency firm facing a case initiated by the U.S. Securities and Exchange Commission (SEC), although the SEC did secure a partial win as well.
While the ruling pertains to the specific circumstances of this case, it is likely to provide support for other crypto companies engaged in legal battles with the SEC, regarding whether their products fall under the regulator’s jurisdiction. The SEC expressed satisfaction with the part of the ruling that determined Ripple violated federal securities law by directly selling XRP to sophisticated investors.
The ruling could potentially be appealed once a final judgment is issued or if permitted by the judge prior to that. The SEC spokesperson stated that the agency is currently reviewing the decision. Ripple’s CEO, Brad Garlinghouse, hailed the ruling as a major victory not only for Ripple but also for the entire U.S. industry.
As a result of the ruling, Coinbase, the largest cryptocurrency exchange in the United States, announced that it would resume trading of XRP on its platform. Coinbase stock experienced a 24% increase, closing at $107 per share on Thursday.
The case revolved around the SEC’s accusation that Ripple Labs and its current and former chief executives conducted an unregistered securities offering worth $1.3 billion through the sale of XRP. This legal battle has been closely watched within the cryptocurrency industry, which challenges the SEC’s claim that the majority of crypto tokens are securities subject to stringent investor protection regulations. While the SEC has initiated over 100 enforcement actions related to cryptocurrencies, asserting that numerous tokens are securities, many of these cases have been resolved through settlements.
In the few instances where cases have gone to court, judges have generally agreed with the SEC’s stance that the crypto assets in question are securities, which, unlike commodities, are subject to strict regulations and require issuer registration with the SEC, along with detailed disclosures to inform investors about potential risks.
Judge Torres ruled that Ripple’s XRP sales on public cryptocurrency exchanges did not qualify as offers of securities under the law because purchasers did not have a reasonable expectation of profit tied to Ripple’s efforts. She described those sales as “blind bid/ask transactions” where buyers could not determine if their payments went to Ripple or any other seller of XRP. To reach her decision, Torres relied on a U.S. Supreme Court case that classified “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 determined that XRP sales conducted on cryptocurrency platforms by Ripple’s CEO, Chris Larsen, and other distributions, including employee compensation, did not involve securities. However, the SEC achieved a partial victory as Torres concluded that Ripple’s $728.9 million of XRP sales to hedge funds and sophisticated buyers constituted unregistered sales of securities.
Torres stated that a jury must determine whether Garlinghouse and Larsen assisted the company’s violation of the law and emphasized that the defendants cannot argue during the trial that they were unaware that XRP was a cryptocurrency.
The ruling is expected to support Coinbase in its own legal dispute with the SEC, as both cases revolve around registration requirements and the classification of specific digital assets as securities under U.S. law. The cryptocurrency industry has called for legislation to establish clear rules for tokens, and this ruling has prompted renewed appeals to Congress to clarify the status of digital assets. Representative Tom Emmer, a Republican and the House of Representatives Majority Whip, highlighted on Twitter that the ruling establishes the distinctiveness of tokens from investment contracts and called for legislative action to solidify this distinction.