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In a ruling that could undermine attempts to regulate cryptocurrencies, a federal judge said Thursday that crypto company Ripple Labs’ token would not be a security if it was sold to retail investors.
The Securities Exchange Commission is pushing for 12 popular cryptocurrencies to be classified as securities, including Ripple’s XRP. This would put them under SEC oversight and allow US crypto exchanges to be classified as unregistered securities brokers.
But US District Judge Analisa Torres made a distinction between sales to institutional investors and sales to private buyers.
While XRP is not a security when individuals buy the token, it is a security when mutual funds and other financial institutions do so, Torres ruled. The judge relied on a legal standard called the Howey test to determine whether a transaction qualifies as an “investment contract” that would make the subject of sale a security.
Their decision was based on institutional investors knowing more about XRP pricing than retail investors.
“A reasonable investor in the position of institutional buyers would have been aware of Ripple’s marketing campaign and the public statements that linked XRP’s price to its own efforts,” Torres wrote.
On the other hand, individual investors are “generally less discerning” and cannot be expected to have “similar ‘understandings and expectations'” of Ripple and XRP, Torres wrote.
Crypto investors found the verdict to be good news. The price of XRP shot up more than 65 percent after the announcement.
“In general, the verdict is slightly better than the crypto industry expected or even hoped for,” said Jason Gottlieb, Morrison Cohen’s chair of regulation enforcement and digital assets.
Gottlieb added that exchanges like Coinbase are winners of the ruling and that while Ripple may have “lost” the notion that its initial offerings to institutions are not securities, this is positive for the company that a large portion of its token sales were not.
“This is a big win for Ripple,” Gottlieb said.
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The SEC first indicted Ripple and two of its executives over two years ago for conducting an unregistered securities offering through the sale of XRP tokens. Thursday’s Torres ruling cited allegations by the SEC that the company sold $728 million worth of tokens to institutional investors, $758 million to the general public and $609 million to its own in exchange for services sold employees and individuals.
The SEC also claims that Ripple executives Bradley Garlinghouse and Christian Larsen made $450 million between 2013 and 2020 by selling their personal stakes in XRP.
Ripple CEO Garlinghouse praised Thursday’s decision. “We thank everyone who helped us make today’s decision – a decision that benefits all crypto innovation in the US,” he said tweeted.
In a statement from the SEC, Torres praised the portion of Torres’ ruling that applies to institutional sales of XRP.
“We are pleased that the court found that XRP tokens were offered and sold by Ripple as investment contracts, which violates securities laws under certain circumstances,” said SEC spokesman Scott Schneider.
Crypto exchange Coinbase launched shortly after Thursday’s verdict activated again Trading XRP. Coinbase was sued by the SEC last month, which accused the company of operating as an unregistered securities exchange, broker, and clearing house since 2019.
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