Jul 13, 2023 - Economy

Judge splits the difference in SEC v. Ripple decision

Data: CoinGecko; Chart: Axios Visuals

A split-the-difference court decision moves the years-long proceeding between the Securities and Exchange Commission and blockchain developer Ripple Labs one step closer to conclusion.

Why it matters: The Ripple case has been closely watched for its potential to move the debate around crypto token classification — a key issue driving regulation and a recent wave of enforcement actions.

Details: The court on Thursday ruled that institutional sales of Ripple's XRP token — such as hedge funds or venture capital firms buying XRP directly from Ripple — "constituted an unregistered offer and sale of investment contracts," thus in violation of federal securities laws.

Yes, but: Secondary sales, or "programmatic sales," of XRP on crypto exchanges, did not, because a secondary market buyer "did not know to whom or what it was paying its money,” the court ruled.

Quick take: It's a win for Ripple.

What they're saying: "The SEC sued me personally too, so I feel vindicated," Brad Garlinghouse, CEO of Ripple tells Axios.

  • He added that Ripple's victory, was more importantly "a win for crypto in the U.S."
  • Stu Alderoty, Ripple's legal counsel, added that it was "a really important, fundamental, legal clarification" from the order: "The digital asset itself is not an investment contract."

Zoom out: The XRP token, and whether it is considered a security, was at the heart of the SEC lawsuit against San Francisco-based Ripple Labs.

  • Flashback: The SEC in 2020 alleged Ripple sold unregistered securities when it, through subsidiaries, sold roughly $728.9 million of XRP to institutions and some $757.6 million of XRP in programmatic sales on crypto exchanges.

State of play: Ripple has been collecting small, but important wins.

  • Internal SEC communications that were made public in June showed that agency officials had expressed concerns about digital assets policy messaging in 2018.
  • William Hinman, then director of the SEC's division of corporation finance, said in a speech in San Francisco that bitcoin and ether were not securities because their underlying networks were "sufficiently decentralized."

The intrigue: Coinbase, the country's largest crypto exchange which is in court itself against the SEC, said following the ruling that it was time to re-list XRP.

What we're watching: Alderoty explained that there are a couple of procedural items outstanding.

  • Because the SEC also personally sued Garlinghouse and co-founder Chris Larsen, alleging they "aided and abetted" in the institutional sales of XRP, it has to bring the facts around that piece of the case to a jury.
  • He said he doubts anyone can prove they acted "recklessly in the face of the massive confusion that the SEC fomented in the space."

Editor's note: This story was updated with additional information throughout.

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