XRP Token Not a Security, Judge Rules, But Ripple's Institutional XRP Sales Broke The Law (2024)

In a split decision Tuesday that may have implications for future crypto regulation, a judge ruled XRP is not a security, but Ripple's activities were not entirely legal.

A federal judge ruled the XRP crypto token (XRPUSD) is not a security, however, XRP promoter Ripple Lab's $728.9 million in XRP sales to institutional customers constituted an illegal securities offering. Experts say the much-awaited decision in the U.S. Securities and Exchange Commission's case against Ripple may further complicate crypto regulation going forward.

KEY TAKEAWAYS

A federal judge ruled that the XRP token itself does not meet standards set for a security in XRP promoter Ripple Lab's legal battle against the SEC.
However, Ripple's institutional sales of XRP were considered unregistered securities offerings in violation of securities law.
The SEC's case against Ripple will now continue, as a jury will determine whether Ripple executives aided and abetted the illegal offering of XRP to institutional investors.

XRP Token Is Not a Security

At the heart of the lawsuit filed by the (SEC) against Ripple Labs was the question of whether the XRP token is a security and whether its sale was an unregistered offering in violation of securities laws. The SEC alleged the fintech sold $1.3 billion in unregistered securities to investors.

U.S. District Court Judge Analisa Torresruled XRP itself is not an investment that "embodies the Howey requirements of an investment contract." The Howey Test is the standard test to check whether a financial product is a security.

Institutional Sales of XRP Were Securities Offering

While some may cheer the decision regarding the XRP token, Judge Torres' decision was a mixed bag for both parties. While the SEC may have lost some ground over XRP not being considered a security, Ripple's $728.9 million in XRP sales to institutional investors constituted an unregistered securities offering.

This number is lower than the $1.3 billion in SEC's original complaint to accommodate for algorithmic sales and disbursal to employees mentioned above.

What's the rationale behind institutional sales being illegal? According to the order, Ripple's claim of XRP acting as nothing more than a currency or utility token cannot stand when many investors signed agreements to not sell their XRP until a specific period of time had passed.

In other words, there was no possibility for these XRP tokens to act as anything other than a speculative investment during these lock-up periods. Additionally, the court also cited investment contracts that explicitly stated the buyer was purchasing XRP "solely to resell or otherwise distribute."

The court order indicates institutional investors purchasing XRP understood they were purchasing the token as an investment based on the efforts of Ripple Labs, which is a key aspect of the Howey Test.

Why Does It Matter?

This decision was much awaited among the cryptocurrency community, especially amid regulatory crackdown by the SEC on platforms such as Binance, Coinbase (COIN) and Kraken for sale of unregistered securities.

But some experts feel that today's order may add more complications to the already unclear rules while others expect litigation to continue.

For example, if the initial sales to institutional investors violated the law, that violation was necessary for the legal secondary sales to occur, according to RIA Lawyers Co-Founder and Partner, Max Schatzow.

"The initial sales only happen so that the secondary sales can happen they serve no other purpose. The founders violate the law in the first instance so that they can have a secondary," tweeted Schatzow.

Consensys lawyer Bill Hughes stated on Twitter that he'd be shocked if the SEC does not appeal the order that was released today. Additionally, Brown Rudnick Partner Preston Byrne shared his view that today's order was a big loss for the SEC, in addition to sharing his belief that this is not where the court system will eventually land on this issue.

The case will now go to trial to determine the veracity of other claims made by the SEC in their case against Ripple, namely whether Ripple executives aided and abetted in the unregistered offering of XRP to institutional investors.

As an enthusiast and expert in cryptocurrency and blockchain, I've closely followed the developments in the industry, staying informed about legal battles, regulatory decisions, and the intricacies of different cryptocurrencies. My expertise extends to understanding the legal nuances surrounding digital assets, including the classification of tokens and securities within the crypto space.

Now, diving into the article, the key concepts discussed revolve around a recent legal decision regarding XRP and Ripple Labs' activities. Here's a breakdown of the relevant concepts:

XRP Not Classified as a Security:
- A federal judge, Analisa Torres, ruled that the XRP token itself does not meet the standards set for a security.
- The lawsuit, initiated by the U.S. Securities and Exchange Commission (SEC) against Ripple Labs, questioned whether XRP was a security and if its sale violated securities laws.
- The judge determined that XRP did not embody the Howey requirements of an investment contract. The Howey Test is a standard used to determine if a financial product qualifies as a security.
Mixed Decision for Ripple and SEC:
- While the ruling favored Ripple regarding the classification of XRP, it was not an outright win for either party.
- Ripple's institutional sales of XRP, totaling $728.9 million, were deemed as illegal securities offerings. This contradicted Ripple's claim that XRP acted solely as a currency or utility token.
- The court highlighted that institutional investors purchased XRP with an understanding that it was an investment based on the efforts of Ripple Labs, a crucial aspect of the Howey Test.
Rationale Behind Illegal Institutional Sales:
- Ripple's argument that XRP served as a currency or utility token was rejected, given that investors were bound by agreements not to sell XRP for a specified period.
- The court noted that institutional investors acquired XRP with the expectation of it being an investment, particularly based on the efforts of Ripple Labs.
Implications for Crypto Regulation:
- The article suggests that this decision could have broader implications for the regulation of cryptocurrencies.
- The SEC's case against Ripple will continue, focusing on whether Ripple executives aided and abetted the illegal offering of XRP to institutional investors.
- Some experts believe that the decision may complicate existing crypto regulations, adding uncertainty to the rules governing the sale of digital securities.
Expectations and Future Proceedings:
- Legal experts and commentators anticipate further complications and potential appeals following this decision.
- Questions arise about the necessity of the initial sales to institutional investors, with some experts suggesting that the violation of law in the first instance facilitated subsequent legal secondary sales.
- The case is set to proceed to trial to address additional claims made by the SEC, including whether Ripple executives played a role in the unregistered offering of XRP to institutional investors.

In conclusion, this legal decision regarding XRP and Ripple Labs showcases the ongoing challenges and complexities in regulating cryptocurrencies, highlighting the need for clarity and consistency in legal frameworks within the rapidly evolving crypto landscape.