In a court decision regarding XRP, both Ripple and the Securities and Exchange Commission (SEC) claim a partial victory
In a significant development for the crypto industry, Judge Analisa Torres of the U.S. District Court for the Southern District of New York has ruled in favour of Ripple, marking a potential turning point in the regulation of cryptocurrencies.
Ripple's general counsel, Stuart Alderoty, characterized the SEC's strategy as "regulation by enforcement" and declared that Thursday's ruling "puts appropriate checks and balances" on the agency's efforts to stifle the crypto economy in the U.S. Sen. Cynthia Lummis, R-WY, echoed this sentiment, stating that the ruling "confirms the need for Congress to deliver a clear regulatory structure for the crypto asset industry."
The SEC, however, sees Thursday's ruling as a win as well. The agency indicated that the court agreed with their view that the Howey test governs the securities analysis of crypto transactions. A jury must now decide whether Ripple's CEO Brad Garlinghouse and co-founder Chris Larsen helped the company violate investor-protection laws with regard to transactions by institutional investors.
The ruling determined that Ripple's token XRP is deemed a security when sold to institutional investors, but not to the general public. As a result, roughly $728.9 million of the total $1.4 billion sold by Ripple was determined to be unregistered sales of securities.
The decision has far-reaching implications, with several institutions, including PayPal, MoneyGram, and Bitstamp, either relisting or continuing to support XRP on their platforms. Coinbase, which sued the SEC in April to force the agency to divulge how it defines a security, re-listed XRP on its platform in the hours following the decision.
The SEC is reviewing the decision and appeals of the general-public portion of the ruling may delay the trial. However, Paul Kisslinger, a former SEC trial attorney, stated that Thursday's ruling "will have a profound impact on cases going forward." Chris Martin, head of research at Amberdata, concurred, suggesting that the SEC "will have to revise their tactics on several of their ongoing cases."
The ruling has also sparked a renewed call for clearer regulations in the crypto space. Sen. Lummis and Sen. Kirsten Gillibrand, D-NY, introduced a bill last year that would expand the role of the Commodity Futures Trading Commission to regulate spot markets for digital assets, and restrict the SEC to overseeing crypto it classifies as securities. The senators are now revising the bill to include greater consumer protection.
Winklevoss, co-founder of Gemini, indicated broader implications, tweeting Thursday that the decision "relegates the SEC to traditional finance and makes it a dinosaur regulator. Buh-bye." Brad Garlinghouse, Ripple's CEO, characterized the SEC as a "bully" in a later interview with Bloomberg.
Matthew Solomon, an attorney for Garlinghouse, is confident a jury will find that the SEC's remaining charge is equally baseless. If the 2nd Circuit Court of Appeals adopts Torres' logic, much of the Coinbase case may be "toast," according to Philip Moustakis, a partner at Seward & Kissel. Coinbase is currently fighting its own legal battle with the SEC, having been sued last month for operating an unregistered national securities exchange, broker, and clearing agency.
As the crypto industry continues to evolve, Thursday's ruling marks a significant step towards clarifying the regulatory landscape. The decision has been hailed as a "watershed moment" by more than a handful of commenters, signalling a potential shift in the way cryptocurrencies are regulated in the U.S.
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