Last Thursday, US District Judge Analisa Torres delivered a far-reaching ruling in a long-winded legal battle between Ripple - the developer of the XRP Ledger blockchain and XRP cryptocurrency - and the US Securities and Exchange Commission (SEC). Many news outlets focused on the part of the ruling that defines XRP as “not a security” for ordinary sales via exchanges. Crypto enthusiasts rejoiced. However, Judge Torres’ second ruling concerning institutional sales of XRP is more of a mixed bag for the institutional investment community. In this article, we go over the case to explain the pivotal implications rising from it for both institutional and retail investors.
Ripple’s Long and Brutal Battle with SEC
Ripple’s lawsuit against the SEC is now in its third year, and rulings under the case are likely to have a tectonic impact on the cryptocurrency investment landscape both for institutional and retail investors.
In December 2020, the SEC filed a lawsuit against the company and its executives, including CEO Brad Garlinghouse and co-founder Chris Larsen. The SEC alleged that Ripple conducted an unregistered securities offering by selling the XRP crypto.
The lawsuit focused on Ripple's sales of XRP to institutional investors and raised concerns about whether XRP should be considered a security under US securities laws. The SEC argued that the sale of XRP constituted an investment contract and that Ripple had failed to register the offering or seek an exemption, thus violating securities laws.
Critical Ruling
A critical ruling in the case was delivered on 13 July. The US District Court where the case is filed delivered a verdict that concerned XRP sales status in two scenarios:
1. XRP has been ruled exempt from the definition of a security in the case of “programmatic sales”. Programmatic sales refer to any sales of an asset conducted via means and platforms where the seller (in this case, Ripple) and the buyer (in this case, any institution, fund, or individual who would like to buy the XRP crypto) don’t directly interact with each other nor conclude any direct contract with the goal of enabling the sale. This means, for instance, that XRP sales via crypto exchanges shouldn’t be viewed as purchases of a security.
2. Ripple’s XRP sales directly to institutional investors, however, have been deemed to constitute instances of a security sale. For example, whenever a hedge fund acquires XRP from Ripple, this sale will now be deemed a security purchase.
Implications for Hedge Funds and Other Institutional Investors
The implications of this ruling for institutional investors are twofold. On the one hand, it provides clarity and regulatory certainty for those institutions that acquire XRP through sales on crypto exchanges. They can engage in these transactions without the additional burden of securities regulations, potentially simplifying their investment process.
Given that XRP is one of the most popular cryptocurrencies held by investment funds and other institutional investors, this part of the ruling is a boon for major crypto exchanges as well.
On the other hand, for institutional investors looking to directly purchase XRP from Ripple, this ruling places them within the framework of securities regulations. They will need to navigate the relevant compliance requirements, including registration and disclosure obligations, similar to those associated with traditional securities investments. This may introduce additional complexities and considerations for institutions when engaging in direct transactions with Ripple for XRP.
Implications for Retail Investors
For retail investors, this ruling provides clarity and reassurance that they can do their investment business as usual without worrying about the SEC suddenly coming after them with a notice of securities laws violation.
Retail investors, however, should note that this ruling isn’t a carte blanche to indulge in buying any crypto without potential attention from the SEC. The ruling defines specifically XRP, and XRP only, as a non-security in the case of exchange-based sales.
By now, the US regulatory landscape with regard to crypto assets is nothing short of a mess. Just last month, the SEC declared dozens of cryptocurrencies to be securities. This includes some popular coins like BNB, MATIC, SOL, and ADA. Until and unless a court ruling similar to the one in XRP’s case is delivered by challenging the SEC’s stance, programmatic sales of these cryptos will still likely be viewed as sales of a security.
Final Thoughts
As the US legal system is heavily based on precedent laws, the new ruling in the long battle between Ripple and the SEC can have far reaching effects on all cryptocurrencies. The ruling will make it harder for the SEC to define exchange-based sales of other coins as security sales.
The SEC is currently involved in a legal battle with the two largest exchanges, Binance and Coinbase, alleging that some cryptos on their platforms are securities. The ruling in XRP’s case will likely bolster the chances of the exchanges in their lawsuits against the SEC.
However, a critical point to take into account is that the SEC can still opt to challenge the decision in a higher court. The powerful watchdog is known for its “hating” on all things crypto. Sweeping all crypto assets under the definition of a security is a long-held dream of the SEC. Given the organisation’s typical stance on crypto, we believe that they will eventually appeal. This is likely to be a long process, though. Ripple’s CEO Brad Garlinghouse believes that it could be years before the SEC lodges an appeal against the pivotal ruling.
Ripple’s Long and Brutal Battle with SEC
Ripple’s lawsuit against the SEC is now in its third year, and rulings under the case are likely to have a tectonic impact on the cryptocurrency investment landscape both for institutional and retail investors.
In December 2020, the SEC filed a lawsuit against the company and its executives, including CEO Brad Garlinghouse and co-founder Chris Larsen. The SEC alleged that Ripple conducted an unregistered securities offering by selling the XRP crypto.
The lawsuit focused on Ripple's sales of XRP to institutional investors and raised concerns about whether XRP should be considered a security under US securities laws. The SEC argued that the sale of XRP constituted an investment contract and that Ripple had failed to register the offering or seek an exemption, thus violating securities laws.
Critical Ruling
A critical ruling in the case was delivered on 13 July. The US District Court where the case is filed delivered a verdict that concerned XRP sales status in two scenarios:
1. XRP has been ruled exempt from the definition of a security in the case of “programmatic sales”. Programmatic sales refer to any sales of an asset conducted via means and platforms where the seller (in this case, Ripple) and the buyer (in this case, any institution, fund, or individual who would like to buy the XRP crypto) don’t directly interact with each other nor conclude any direct contract with the goal of enabling the sale. This means, for instance, that XRP sales via crypto exchanges shouldn’t be viewed as purchases of a security.
2. Ripple’s XRP sales directly to institutional investors, however, have been deemed to constitute instances of a security sale. For example, whenever a hedge fund acquires XRP from Ripple, this sale will now be deemed a security purchase.
Implications for Hedge Funds and Other Institutional Investors
The implications of this ruling for institutional investors are twofold. On the one hand, it provides clarity and regulatory certainty for those institutions that acquire XRP through sales on crypto exchanges. They can engage in these transactions without the additional burden of securities regulations, potentially simplifying their investment process.
Given that XRP is one of the most popular cryptocurrencies held by investment funds and other institutional investors, this part of the ruling is a boon for major crypto exchanges as well.
On the other hand, for institutional investors looking to directly purchase XRP from Ripple, this ruling places them within the framework of securities regulations. They will need to navigate the relevant compliance requirements, including registration and disclosure obligations, similar to those associated with traditional securities investments. This may introduce additional complexities and considerations for institutions when engaging in direct transactions with Ripple for XRP.
Implications for Retail Investors
For retail investors, this ruling provides clarity and reassurance that they can do their investment business as usual without worrying about the SEC suddenly coming after them with a notice of securities laws violation.
Retail investors, however, should note that this ruling isn’t a carte blanche to indulge in buying any crypto without potential attention from the SEC. The ruling defines specifically XRP, and XRP only, as a non-security in the case of exchange-based sales.
By now, the US regulatory landscape with regard to crypto assets is nothing short of a mess. Just last month, the SEC declared dozens of cryptocurrencies to be securities. This includes some popular coins like BNB, MATIC, SOL, and ADA. Until and unless a court ruling similar to the one in XRP’s case is delivered by challenging the SEC’s stance, programmatic sales of these cryptos will still likely be viewed as sales of a security.
Final Thoughts
As the US legal system is heavily based on precedent laws, the new ruling in the long battle between Ripple and the SEC can have far reaching effects on all cryptocurrencies. The ruling will make it harder for the SEC to define exchange-based sales of other coins as security sales.
The SEC is currently involved in a legal battle with the two largest exchanges, Binance and Coinbase, alleging that some cryptos on their platforms are securities. The ruling in XRP’s case will likely bolster the chances of the exchanges in their lawsuits against the SEC.
However, a critical point to take into account is that the SEC can still opt to challenge the decision in a higher court. The powerful watchdog is known for its “hating” on all things crypto. Sweeping all crypto assets under the definition of a security is a long-held dream of the SEC. Given the organisation’s typical stance on crypto, we believe that they will eventually appeal. This is likely to be a long process, though. Ripple’s CEO Brad Garlinghouse believes that it could be years before the SEC lodges an appeal against the pivotal ruling.