July 13 (Portal) – Ripple Labs Inc did not violate federal securities laws by selling its XRP token on public exchanges, a U.S. judge ruled Thursday, a landmark legal victory for the cryptocurrency industry that skyrocketed the value of XRP snapped.
According to data from Refinitiv Eikon, XRP is up 75% late Thursday afternoon.
U.S. District Judge Analisa Torres’ ruling marked the first victory for a cryptocurrency company in a case brought by the U.S. Securities and Exchange Commission — although it also gave the SEC a partial victory.
Although the decision is specific to the facts of the case, it will likely provide ammunition for other crypto firms fighting with the SEC over whether their products fall under the regulator’s jurisdiction.
An SEC spokesman said the agency was pleased with part of the ruling, in which the judge found that Ripple violated the federal securities law by selling XRP directly to sophisticated investors.
There is an opportunity to appeal the judgment once a final judgment has been rendered or if the judge allows it beforehand.
The SEC spokesman said the regulator is reviewing the decision.
Brad Garlinghouse, Ripple CEO, described the ruling in an interview as “a big win for Ripple, but even more important for the entire industry in the US”.
Coinbase (COIN.O), the largest US crypto exchange, said it will resume trading in XRP on its platform.
“We have read Judge Torres’ considered decision. We have carefully checked our analysis. It’s time for a re-recording,” Paul Grewal, Coinbase’s chief legal officer, said on Twitter.
Coinbase shares closed Thursday up 24% at $107 per share.
WHEN CRYPTO IS NO SECURITY
The SEC had accused the company and its current and former directors of conducting an unregistered securities offering worth $1.3 billion by selling XRP created by Ripple’s founders in 2012.
The case has been closely watched in the cryptocurrency industry, which disputes the SEC’s claim that the vast majority of crypto tokens are securities and are subject to its strict investor protection regulations. The agency has launched more than 100 enforcement actions against cryptocurrencies, claiming that various tokens are securities, but many have ended in settlements.
In the few cases that went to court, judges agreed with the SEC that the crypto assets in question were securities that, unlike assets like commodities, are tightly regulated by their issuer at the SEC registration and require detailed disclosures for information to inform investors of potential risks.
Torres ruled that Ripple’s XRP sales on public cryptocurrency exchanges were not offerings of securities for the purposes of the law, as buyers had no reasonable expectation of any profit associated with Ripple’s efforts.
These sales are “blind bid/ask transactions,” she said, where buyers “could not have known if their money payments went to Ripple or another XRP seller.”
Torres addressed a U.S. Supreme Court case that said, “A cash investment in a joint venture, the profits of which are derived solely from the efforts of others,” is a type of security called an investment contract.
Torres ruled that XRP sales on cryptocurrency platforms by Garlinghouse and co-founder and former CEO Chris Larsen, as well as other distributions, including employee compensation, also did not include securities.
PARTIAL PROFIT FOR THE SEC
The SEC gained a partial victory as Torres determined that the company’s $728.9 million in XRP sales to hedge funds and other sophisticated buyers were unregistered security sales.
Torres ruled that Ripple’s marketing aimed at institutional investors made it clear that the company was “making a speculative value proposition for XRP” that depended on the company’s efforts to develop the blockchain infrastructure behind the digital asset.
She said a jury must decide whether Garlinghouse and Larsen supported the company’s wrongdoing and that the defendants could not argue in court that they lacked “fair notice” that XRP was a cryptocurrency.
“The law does not require the SEC to alert all potential violations at the individual or industry level,” she said.
DEMANDS LEGISLATION
Katten Muchin Rosenman attorney Gary DeWaal said the ruling should help Coinbase fight its own SEC case.
The market reaction shows that the ruling is a “huge event for the industry,” he said.
Both the Ripple and Coinbase cases focus on registration requirements and whether certain digital assets are securities under US law.
The crypto industry has called for legislation providing clear rules for tokens, and the ruling brought new demands for Congress to clarify the status of digital assets.
House Majority Leader Tom Emmer, a Republican, said in a post on Twitter that the ruling states that “a token is separate and distinct from an investment treaty to which it may or may not belong.”
“Now we’re going to make it law,” he said.
Reporting by Jody Godoy and Chris Prentice in New York and Tom Hals in Wilmington, Delaware; Adaptation by Chizu Nomiyama, Conor Humphries, Leslie Adler and David Gregorio
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