In a split decision Tuesday that may have implications for future crypto regulation, a judge ruled XRP is not a security, but Ripple's activities were not entirely legal.
A federal judge has ruled that XRP's currency token is not a security, and that XRP promoter Ripple Lab's $728.9 million sales to institutional customers constituted an illegal securities offering. Experts say the much-awaited decision in the U.S. SEC's case against Ripple may further complicate crypto regulation going forward.
The issue at the heart of the lawsuit by Ripple Labs was whether the XRP token is a security measure and whether its sale was an unregistered offering in violation of securities laws. The SEC argues that fintech sold $1.3 billion in unregistered securities to investors.
U.S. District Court Judge Analisa Torres ruled that XRP is not an investment that embodies the Howey requirements of an investment contract. Some distributions of XRP were deemed to not be securities offerings. XRP was also algorithmically sold on exchanges to unknown buyers and used as compensation for employees and other parties.
After the order, the XRP price jumped about 56%.
Judge Torres' decision regarding the XRP token was a mixed bag for both sides. While the SEC may have lost some ground over XRP not being considered a security, Ripple's $728.9 million in XRP sales to institutional investors constituted an unregistered securities offering.
The number is less than the $1.3 billion in SEC's original complaint to accommodate algorithmic sales and disbursal to employees mentioned above.
What is the rationale behind institutional sales? What are the legal requirements for institutional sales? The order alleges that XRP acting as nothing but a currency or utility token cannot stand until many investors signed agreements to not sell their XRP until a specified period of time had passed, leading to a claim of XRP acting as nothing more than a currency or utility token.
The court's decision indicates that institutional investors purchasing XRP were aware that they were purchasing the token as an investment based on the efforts of Ripple Labs, which is a key aspect of the Howey Test.
The cryptocurrency community was eagerly awaiting this decision, particularly due to the SEC's regulatory crackdown on platforms like Binance, Coinbase, and Kraken for the sale of unregistered securities.
Some experts think that today's order may add more complicated issues to the already clear rules, while others expect litigation to continue.
If initial sales to institutional investors violated the law, that violation was necessary for the legal secondary sales to occur, said Max Schatzow, RIA Lawyers co-founder and partner.
Consensys lawyer Bill Hughes said he'd be stunned if the SEC does not appeal the order released today. Brown Rudnick Partner Preston Byrne shared his belief that today's order was a big loss for the SEC, in addition to sharing his belief that this is not where the court system will eventually land on this issue.
The case will now go before the SEC to determine the veracity of other claims made by the SEC in their case against Ripple, namely, whether Ripple executives aided and abetted in the unregistered offering of XRP to institutional investors.