Ripple SEC Case Ruling A big step forward for the cryptocurrency industryRipple SEC Case Ruling A milestone for the crypto industry
Author: ANDREW ST. LAURENT, compiled by blockworks: Shanooba, LianGuai
The recent ruling in the SEC v. Ripple Labs case is seen as a major step forward for the cryptocurrency industry. The ruling, issued by Judge Analisa Torres in a 34-page document, highlights the key point that Ripple Labs did not violate U.S. securities laws because they sold XRP to ordinary digital transaction users anonymously. This poses a significant obstacle to the U.S. Securities and Exchange Commission’s long-term strategy of regulating cryptocurrencies through judicial orders and scattered actions.
This ruling is good news for XRP holders as they can continue to hold and purchase XRP tokens without any additional conditions. The ruling also has implications for the SEC’s strategy in future similar cases, including those against cryptocurrency projects like Terra.
Although this ruling brings benefits to certain projects, it does not mean that emerging cryptocurrency projects no longer face challenges. Regulatory issues, compliance, security, and market volatility are still important challenges faced by the cryptocurrency industry. Vigilance and effort in all aspects are still needed for future development and progress.
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In her decision, Judge Torres set forth two review standards for assessing whether Ripple Labs sold unregistered securities: one for the way XRP was sold to sophisticated hedge funds and other institutional investors, and another for the way it was treated by everyday consumer investors who publicly used XRP and accessible cryptocurrency exchanges.
In the review process, she found that Ripple Labs did not sell unregistered securities to non-professional cryptocurrency traders, but did so when selling to experienced investors. The basis for her distinction was that ordinary investors who purchased XRP between 2011 and 2020 did not receive any investment materials, direct communication, or legal agreements from Ripple regarding trading XRP. Instead, many traders, according to the operation of digital exchanges, were unaware of whether they purchased tokens from Ripple Labs.
In contrast, she found that Ripple’s marketing to institutional investors relied on Ripple’s token purchase agreements, marketing materials, and executive speeches and communication about Ripple’s role in creating value for XRP tokens. Through these communications, Judge Torres found that Ripple’s activities conveyed to these experienced investors a message that XRP, which is associated with Ripple Labs’ success, has a “speculative value proposition”.
This binary analysis is not uncommon. The SEC also issued similar analysis in its earlier 2018 “Digital Asset ‘Investment Contract’ Analysis Framework”.
Nevertheless, this decision should still serve as a notice to publicly-oriented cryptocurrency projects that they may still be subject to sanctions, depending on how they sell tokens and market their products to different audiences. The cryptocurrency industry needs to carefully assess how it sells tokens to ensure compliance with relevant securities regulations.
The cryptocurrency industry needs to closely monitor the actions of regulatory agencies
Fortunately, this decision provides some guidance for the cryptocurrency industry, allowing companies to take steps to assess whether their activities comply with US securities regulations. For example, Judge Torres found that Ripple’s purchase agreements were similar to investment contracts in terms of including lock-up provisions, resale restrictions, indemnification provisions, and purpose statements.
In addition, the company’s market reports and brochures for potential investors both highlighted the close correlation between the XRP token and Ripple Labs’ success, as well as the Ripple Labs leadership promoting how XRP’s price could be increased through increasing interest in Ripple and certain capital investments on YouTube and Reddit. However, despite these measures, they did not change the final ruling.
The Securities and Exchange Commission may request the Second Circuit Court of Appeals to review Judge Torres’ decision at this stage. Although this decision does not fully meet everything the cryptocurrency industry hopes for, it does provide some roadmap and reference for the current legal uncertainties that plague the industry. In the future, the cryptocurrency industry needs to closely monitor the actions of regulatory agencies to ensure that it makes appropriate adjustments in terms of compliance.
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