Ripple Vs. SEC Case: Was the Celebration Too Early for the Crypto?

On July 13, the US District Court for the Southern District of New York ruled on the long-running Ripple VS. SEC lawsuit. The court's declaration represented a victory for Ripple and the entire crypto industry as it exempted XRP as a security.

Though short-lived, Ripple's partial victory stirred huge celebration and price rallies for assets across the crypto market. However, the decision still needed to provide regulatory clarity on the future of cryptocurrencies in the United States.

That raised the question: Was the celebration in the crypto industry too early?

The Unusual Court Decision

The US Securities and Exchange Commission (SEC) sued the blockchain company Ripple and some of its executives in December 2020. According to the lawsuit, the firm violated securities laws by selling XRP as an unregistered security.

The regulator's claims against Ripple depend on whether the latter's distribution of XRP was a security according to the Securities Act. Moreover, the focus should be whether the stated XRP transactions satisfy the Howey Test outlined by the Supreme Court.

In the Ripple vs. SEC case, the ruling pointed out the key principle regarding the SEC's jurisdictional oversight of digital assets. Notably, this depends on the tokens' nature of offers or sales rather than the intrinsic qualities of the assets.

The court's declaration gave a new hope for the crypto industry, hence the celebration. However, other aspects of the ruling for Ripple's operations could set in a reversal during an appeal on the summary, fortifying the securities regulator.

According to the Howey Test, three conditions classify an investment contract as a security. The transaction will involve an investment of money, a common enterprise, and expected gains from the impact of others.

Meeting the conditions means that Ripple was expected to maintain certain compliance obligations and some public disclosures, which it never did.

Moreover, the court's decision indicated that some of Ripple's distributions of its native token meet the Howey Test. It pointed out that XRP sales to institutional investors are securities.

But Ripple's programmatic sales of XRP to retail investors on crypto exchanges and the company's transfers of XRP to employees or vendors as payment for services are not securities.

The declaration gave the SEC a win on Ripple's institutional sales only. The regulator's claims against Ripple's executives, Christian Larson and Brad Garlinghouse, will still proceed to trial. Already, the duos have declared their innocence to all allegations from the SEC.

What's the Stance for the Crypto Industry

Before now, the crypto industry has been clamoring for clear regulations from jurisdictional regulators, especially in the US. It expected a more distinctive and transaction-based clarity to the Howey test.

The court's ruling on the Ripple vs. SEC case that differentiated categories of XRP investors gave the industry a clear directive. Following the ruling, one of the motivations for the industry could be to exclude secondary market transactions from the SEC's regulatory oversight.

This mainly lies on market intermediaries, especially crypto exchanges, under the strict SEC regulations.- The exchanges could decide the mode of their operations: to broker, deal, clear, or function as an exchange for trading securities.

Regarding the issue of anticipating profit from other people's efforts, the court's ruling highlighted that the ability to discern one's privity is paramount. This is a close means of distinguishing secondary market transactions (as applicable to programmatic sales).

Also, the ruling exempts private direct sales of assets from promoters such as Ripple as securities. Additionally, the court's interpretation of Howey's prong on investment-of-money' could set precedence in crypto, driving the use of digital assets.

Extensively, such utility will include developer grants, employee compensation, and promotional giveaways like airdrops and others.

An Appeal Could Overturn Everything And Bring In The Worse

Even though the court's ruling gave Ripple a partial win, triggering celebration in the crypto space, the end is still not here. The SEC could appeal the decision, overturning everything and setting the worst in the industry.

There seems to be a contradictory result regarding the court's view on the accessibility of information about Ripple by XRP investors. Institutional investors of XRP, through their transactions, are privy to most details regarding how Ripple's operations could impact XRP. But the court declared such transactions as securities.

Conversely, XRP sales to retail investors on exchanges are rated as non-securities and require no disclosure. However, these people already have the most information about the activities of the token issuer but receive a right to more. Those with the least information (institutional investors) got nothing.

Further, the court's ruling regarding other distributions' appears shaky. Not only does it contradict the precedent that sales of securities mustn't involve the transfer of physical items of value, but it also creates a loop in Howey for other non-traditional types of financing.

The industry should expect the worst if the Second Circuit Court of Appeals reverses one or both of the rulings. The SEC will have its needed precedential case backup to enforce the Howey Test to the crypto industry.

Moreover, the regulator will see a robust weapon to fight its legal battle against crypto exchanges Binance and Coinbase over the alleged securities listing.

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