Bankless Winners and Losers of the XRP JudgmentXRP Judgment Winners and Losers
Original Title: The Winners and Losers of Today’s XRP Judgment
Original Author: Jack Inabinet
Original Source: bankless
Translation: Kate, Marsbit
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Let’s interpret today’s simplified judgment on the SEC’s lawsuit against Ripple Labs
Today, the U.S. Securities and Exchange Commission (SEC)’s simplified judgment on the Ripple Labs case indicates that the digital token XRP is not a security, which is very frustrating for Gary Gensler and his SEC allies. This news has caused the price of XRP to soar and pushed up the prices of many other cryptocurrencies.
Today, we will interpret this ruling, showing the winners, losers, and lingering uncertainties brought about by this latest development.
– Bankless Team
Just in: big news! It’s only halfway through 2023, but we may have just received the most influential legal decision of the year… Earlier today, Judge Analisa Torres issued a simplified judgment on the SEC’s lawsuit against Ripple Labs!
Since December 2020, the U.S. Securities and Exchange Commission (SEC) has been in a deadlock in the court system regarding the case against Ripple Labs and its key personnel, CEO Brad Garlinghouse and founder Chris Larsen (defendants). In this case, the SEC accuses Ripple of failing to register XRP as a security before continuing to offer tokens worth $1.38 billion for sale or other consideration.
Today, we will analyze the implications of this simplified judgment, study why it is bullish for certain cryptocurrencies, and explain why the outcome is unsatisfactory for both Ripple and the SEC.
Is XRP a security?
In a major victory for digital assets, the court found that XRP, as a digital token, does not meet the requirements of the Howey test and is therefore not a security!
The Ripple case is a monumental development in establishing that a token is separate and distinct from an investment contract it may or may not be part of. Now, let’s make it law. 👇 pic.twitter.com/FZtO1BzfWX
— Tom Emmer (@GOPMajorityWhip) July 13, 2023
However, the security status of XRP is unrelated to whether XRP transactions constitute investment contracts. After all, even certain commodity transactions can be considered investment contracts depending on the circumstances of the sale.
Source: U.S. District Court for the Southern District of New York
To determine whether a transaction qualifies as an investment contract, U.S. courts take a very subtle approach and individually examine the validity of such claims for each type of transaction.
The SEC claims that various forms of transactions constituted unregistered XRP issuance and sales, but upon careful examination, the court found that only one type of transaction constituted unregistered XRP issuance and sales, namely Ripple’s institutional sales.
This is is a huge win for Larsen, Garlinghouse and the XRP community.
1. While the court rules that some of Ripple's "Institutional Sales" of XRP were investment contracts and thus, the sale of unregistered securities,
2. Ripple's sales of XRP to "Programmatic Buyers"… https://t.co/FWSYgO8x3q
— MetaLawMan (@MetaLawMan) July 13, 2023
Experienced buyers participating in Ripple’s institutional sales directly purchased XRP from the company. Therefore, they have reason to expect Ripple to use the funds obtained from their sales to improve the XRP ecosystem, thereby increasing the price of XRP. This scheme satisfies all four aspects of the Howey test.
On the other hand, purchasers of XRP tokens sold through Ripple’s programmatic distribution engage in blind transactions and cannot know whether Ripple has received their funds. The court held that such transactions do not constitute investment contracts.
Institutional sales of XRP to sophisticated investors satisfy Howey…but, who cares, because that can be covered under exemptions to registration under Reg D. pic.twitter.com/pMesJuMIe4
— Meat (🥩,🥩) (@MeatEsq) July 13, 2023
In addition, the court found that the distribution of XRP tokens used to pay employee wages and compensate third parties for developing XRP and the XRP Ledger is also not considered an investment contract because, under the plan, no investors inject funds into Ripple.
The sale of XRP on the secondary market is not within the scope of this case, and it is currently unclear whether such distribution or sale constitutes an investment contract. Unfortunately, today’s summary judgment raises a question mark for the legality of this portion of the liquid cryptocurrency market in the crypto industry.
Source: United States District Court for the Southern District of New York
As expected, the asset most affected by the SEC’s enforcement action today is the asset directly targeted by the SEC.
XRP has plummeted, while blue-chip cryptocurrencies targeted by previous SEC enforcement actions have been stronger in the news than most assets, with SOL and MATIC achieving double-digit growth.
In the past few months, the FUD propagated by the SEC regarding the regulatory status of certain tokens suddenly disappeared. Coinbase itself is a target of the SEC investigation, and it is one of the biggest beneficiaries today (aside from XRP), with an increase of nearly 25%!
While today’s summary judgment is not as extensive as many in the crypto community had hoped, and concerns about the legality of sales on the secondary market still exist, Judge Torres’ decision does help the crypto industry by establishing an important precedent that can be used by exchanges like Coinbase to fight against the SEC.
The ruling that XRP is not itself an investment contract is a significant blow to the SEC's case against @Coinbase and the other crypto exchanges.
While Judge Torres' decision is not "binding precedent" it is extremely well reasoned and will be cited in all motions to dismiss. https://t.co/FWSYgO8x3q
— MetaLawMan (@MetaLawMan) July 13, 2023
Although this is a “win” for the cryptocurrency industry, it is not the case for any party involved…
For the SEC, today’s summary judgment is a complete failure!
While the agency can continue to sue Ripple for its unregistered sales to institutions, many of Ripple’s token distribution mechanisms have been found to be completely legal, and today’s judgment may have opened the door to the legalization of token sales on the secondary market. The SEC may appeal Judge Torres’ ruling to prevent it from being used as the basis for future legal arguments.
For Ripple Labs and key individuals who directly sell XRP tokens to investors, this is just the beginning!
Ripple Labs and the named co-defendants will inevitably have to face the SEC in court unless they successfully appeal the decision that their institutional sales constitute unregistered securities offerings.
The most important part of this ruling:
“XRP, as a digital token, is not in and of itself a “contract, transaction[,] or scheme” that embodies the Howey requirements of an investment contract.”
This is a now a matter of law (not up for trial.)
— Brad Garlinghouse (@bgarlinghouse) July 13, 2023
If they fail to defend against these charges, the consequences will be severe, as the SEC is seeking to recover the funds raised illegally (Ripple raised $729 million through institutional sales) and wants to prohibit the defendants from providing or selling XRP to any entity or individual.
Only time will tell the outcome of the SEC’s case against Ripple. Although both parties are at least partially dissatisfied with today’s ruling, it is clear that investors see today’s summary judgment as a positive development for entities in the cryptocurrency industry that are also under SEC scrutiny.
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