Rattling the Status Quo: Was Ripple’s Victory over SEC Really a Breakthrough for Crypto?

The United States (US) Securities and Exchange Commission (SEC) has been out for blood for quite some time, one of more recent crackdowns on two leading digital assets platforms, Binance and Coinbase.

But it seems like the tide might be turning in favour of the crypto community when a ground-breaking ruling was handed down near the end of last week, and it concluded that Ripple did not contravene federal securities law in situations where programmatic buyers acquired XRP on digital exchanges. So how did it start?

Better Late Than Never
In 2020, Ripple Labs Inc found itself embroiled in a consequential legal battle, as the SEC launched a lawsuit against the company. The SEC's primary allegation was that Ripple engaged in an unregistered securities offering through the sale of its XRP token. At the core of this dispute lay the crucial question of whether XRP should be classified as a security.

Hence, the judgment by US District Judge Analisa Torres, represents a significant turning point in the extensive three-year legal confrontation between the San Francisco-based payments firm and the US regulatory body.

The judge wrote, “Institutional buyers would have understood that Ripple was pitching a speculative value proposition for XRP with potential profits to be derived from Ripple’s entrepreneurial and managerial efforts.”

In a tweet on 14 July, Chief Legal Officer of Ripple, Stuart Alderoty, called the judgment “a huge win”.

Not a Complete Win But only a Partial Win
So many headlines started flooding the news after the ruling was made about how Ripple won big; how it is the first win for a crypto company in a case brought by the SEC; how this case will provide ammunition for other crypto firms going against the SEC. But in truth, there exists a minority voicing out that since Ripple won partially, that meant SEC won too.

While investors may find some solace in the recent court ruling, it is crucial to consider the insights shared by Ben Caselin, the Vice President and Chief Strategy Officer at MaskEX in Dubai. He cautions against prematurely celebrating the outcome, suggesting that the ongoing tug-of-war between Ripple and the SEC is far from reaching its conclusion.

He explained in an email, “Due to their peer-to-peer and digital native nature, cryptocurrencies do not easily allow for regulation in the traditional sense, but, going forward, if projects and companies who issue tokens want to deal with the general public and institutional investors, they might want to practice more caution compared to a few years ago.”

In a response to the court ruling, an SEC spokesperson expressed satisfaction with a specific aspect of the decision. Despite the judge determining that Ripple had indeed violated federal securities law by directly selling XRP to sophisticated investors, this ruling is not set in stone, as there are potential avenues for appeal once a final judgment is rendered, or even before that if the judge permits.

To dive into the details on how this is a partial win for the US regulator, it was determined that Ripple's sales of $728.9 million worth of XRP to hedge funds and sophisticated buyers constituted unregistered sales of securities. The judge’s ruling sheds light on Ripple's marketing strategies, which heavily targeted institutional investors. According to the judge, Ripple's messaging clearly presented XRP as a speculative asset, with its value proposition hinging on the company's efforts to advance the underlying blockchain infrastructure.

Interestingly though, the judge has left it to a jury to decide whether Ripple's CEO Brad Garlinghouse and co-founder Chris Larsen played a role in facilitating the company's violation of securities law. Furthermore, she emphasised that the defendants cannot argue during the trial that they were unaware of XRP's classification as a cryptocurrency.

Alarm Bells are Ringing but Everyone is too Busy Celebrating
Ripple's recent fractional win has sparked mixed reactions within the crypto community, with some expressing concerns and criticism. Industry experts speculate that Ripple's classification as a non-security potentially allows both the company and its founders to freely offload their token holdings.

This influx of selling pressure could have a notable impact on exchanges, reminiscent of previous instances where crypto founders and developers engaged in "pump and dump" schemes, leading to substantial losses for unsuspecting market participants. The designation of XRP as a non-security raises the question of whether this could encourage similar projects and practices, ultimately exerting a negative influence on participants within the cryptocurrency ecosystem.

Antonio Juliano, the founder of dYdX, raises a thought-provoking question: If a token like XRP, which lacks a distinct purpose beyond being offloaded in the open market, is not deemed a security, what implications does this have for the broader realm of cryptocurrencies? His cautionary statements serve as a stark reminder to all crypto market participants, shedding light on the ever-present risk of "pump and dump" schemes that can permeate the market

Preston Byrne, a partner at Brown Rudnick and a notable figure in the crypto entrepreneurial space, holds a perspective that suggests the journey for XRP is far from over. Despite the recent ruling, there is an ongoing review by the SEC, which introduces the possibility of the case proceeding to trial in the near future.

In a LinkedIn post on 14 July, John Reed Stark, the former chief of internet enforcement at the SEC, expressed his belief that the ruling in the Ripple case is "ripe for appeal" and likely to be overturned.

He pointed out that the court decision, which was hailed as a significant milestone by Cameron Winklevoss, appears to rest on shaky ground. According to John, the ruling raises concerns on multiple fronts, as it seems to contradict the SEC's mission of safeguarding investors.

Notably, despite the court ruling that XRP is not a security when traded on crypto exchanges, he highlighted that this lack of protection extends to retail investors. This creates a peculiar situation where a "class of quasi-securities" emerges, discriminating and adapting based on the sophistication of the investors involved. John argued that such discrimination is counter-intuitive, inconsistent with established SEC case law, and unprecedented in this context.

Additionally, the court's assertion that tokens sold through exchanges are not securities due to the presumed ignorance of exchange customers is deemed inadequate by John, who emphasised that ignorance or an unwillingness to conduct research has never served as a valid defense in securities violations. He further expressed his concerns about the ruling's patronising nature, stating that it is not only patronising but also insulting to assume that retail investors are typically unintelligent. In fact, he believes that retail investors are not as uninformed as the court ruling presumes.

He concluded, "The bottom line: Stock is always stock – it can’t transmogrify into 'not stock.' So my take is that the SEC will appeal the Ripple decision to the 2nd Circuit and the 2nd Circuit will overturn the District Court’s rulings related to 'programmatic' and 'other sales'.”

Brian Quintenz, previously a commissioner of the Commodity Futures Trading Commission (CFTC) and currently serving as the head of policy for venture capital fund a16z crypto, expressed his concerns about the recent Ripple court ruling. He believes that rather than providing clarity, the ruling has introduced further uncertainty for entrepreneurs and builders within the cryptocurrency industry.

Numerous Uncertainties Amidst the Rejoicing
The Ripple case is far from reaching its conclusion and is slated to proceed with its own trial in due course. While the crypto community may be rejoicing as prices surge across the board, there remain numerous uncertainties that warrant a closer look, leaving the sector with valid reasons for concern.