XRP, Coinbase Surge As Investors Take Favorable View Of Ripple ...

Brad Garlinghouse, chief executive officer of Ripple Labs Inc., Photographer: Kyle Grillot/Bloomberg

Ripple Labs Inc. won what looks like a partial victory in the suit against it by the Securities and Exchange Commission, sending cryptocurrency prices sharply higher, as Judge Analisa Torres ruled that some cryptocurrency transactions do not count as securities sales. Although the district court decision is not binding elsewhere, it does indicate that the SEC’s insistence that most digital assets are securities that should be registered–which is impossible to do under current regulations–can be successfully challenged.

This has implications for other actions undertaken by the agency against crypto exchanges and other intermediaries. The SEC sued Ripple in December 2020, alleging that the company’s sales of $1.3 billion of digital asset XRP XRP XRP since 2013 constituted an unregistered securities offering.

In a summary judgment the court determined that the $757.6 million of XRP that Ripple sold in programmatic sales to retail buyers. The court also ruled the use of XRP as payment for employee wages and other services did not meet the criteria of an investment contract. “Whereas the Institutional Buyers reasonably expected that Ripple would use the capital it received from its sales to improve the XRP ecosystem and thereby increase the price of XRP, programmatic Buyers could not reasonably expect the same.”

Ripple was given 80 billion units of the XRP currency (of a 100 billion limit) by the original founding team for the purposes of helping to develop its blockchain, the XRP ledger. This stands in contrast to the more typical pattern of initial coin offerings that are sold from a currency’s creators to other investors, although founding teams or decentralized foundations can maintain sizable holdings.

The ruling fell short of a complete crypto victory because the judge determined that the $728.9 million of XRP sold by the company to institutional investors was an illicit offering, ruling that “Based on the totality of circumstances, the Court finds that reasonable investors, situated in the position of the Institutional Buyers, would have purchased XRP with the expectation that they would derive profits from Ripple’s efforts.”

The value of all cryptocurrencies jumped almost 6% to $1.3 trillion after the ruling was announced, and XRP surged 76% to 82 cents, according to CoinGecko, making it the fourth-largest digital asset. The Coinbase exchange’s stock price jumped almost 20% as investors saw the ruling as bullish for the company’s own fight against the SEC, which has accused it of acting as an unregistered securities market. Interestingly, the exchange actually dropped the trading of XRP in 2020 when the Ripple suit was announced.

However, today’s ruling does not necessarily give exchanges the all-clear. Stephen Palley, a partner at Brown Rudnick and co-chair of digital commerce practice, told Forbes that there is some important nuance that needs to be taken into account when it comes to looking at the power of this ruling to set a precedent for other cases. “The court says in a footnote that it is not ruling on whether or not secondary transactions are securities transactions,” said Palley. “It said that there was no way for somebody using these platforms [crypto exchanges] to know that Ripple is on the other side. Therefore, the court concluded that there couldn't have been an expectation of profit based on the efforts of Ripple.”

Palley does wonder if this logic will make it harder for other courts in the future to argue that secondary sales are investment contracts. “I don't see how you can conclude that a transaction where Ripple was on one side wouldn't be securities transactions, but transactions between two non-Ripple parties would be.”

Palley said he would not be surprised if today’s rulings are appealed and eventually reach the Supreme Court , even before the trial formally commences. Issues still to be worked out would be the type of remedy for the illegal institutional sales, were that ruling to hold. Although the SEC can only file civil charges, the regulator could seek financial penalties such as disgorgement of profit.

Other judges, including those handling other SEC actions against cryptocurrency-related companies, are not necessarily bound by today’s judgment according to Palley.

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