A federal judge has ruled that XRP, the crypto token promoted by Ripple Labs, is not considered a security. However, the judge also found that Ripple’s activities, including $728.9 million in XRP sales to institutional customers, constituted an illegal securities offering. This decision could have implications for future cryptocurrency regulation in the United States.
The ruling in the U.S. Securities and Exchange Commission’s (SEC) case against Ripple has finally provided clarity on whether XRP is a security. According to the judge, XRP does not meet the requirements to be classified as an investment contract. However, the court determined that Ripple’s sales of XRP to institutional investors were in violation of securities laws, as they were unregistered offerings. This decision may complicate the regulatory landscape for cryptocurrencies moving forward.
KEY TAKEAWAYS
- The judge ruled that the XRP token itself does not meet the standards of a security, but Ripple’s sales of XRP to institutional investors were considered unregistered securities offerings.
- The SEC’s case against Ripple will proceed to trial to determine if Ripple executives aided and abetted in the illegal offering of XRP to institutional investors.
XRP Token Is Not a Security
In the SEC’s case against Ripple Labs, the central question was whether XRP should be classified as a security and if its sale violated securities laws. The judge ruled that XRP does not fulfill the requirements of an investment contract, as defined by the Howey Test, which is used to determine if a financial product is a security.
However, the court did acknowledge that Ripple’s sales of XRP to institutional investors were illegal securities offerings. While other distributions of XRP, such as sales on exchanges to unknown buyers and compensation for employees, were not considered securities offerings. This decision had an immediate impact on the price of XRP, which jumped by approximately 56%.
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Institutional Sales of XRP Were Securities Offering
While the court’s ruling on XRP not being a security may be seen as a positive development for some, it was not a complete victory for either party. The judge determined that Ripple’s sales of XRP to institutional investors were illegal securities offerings, amounting to $728.9 million. This amount was adjusted from the SEC’s original complaint of $1.3 billion to account for other distributions of XRP, such as algorithmic sales and compensation to employees.
The court based its decision on the fact that Ripple promoted XRP as a currency or utility token while imposing restrictions on investors from selling their XRP for a specific period of time. This hindered the tokens’ ability to function as anything other than a speculative investment during those lock-up periods. The court also highlighted investment contracts that explicitly stated the buyer’s intent to resell or distribute XRP.
The court’s decision emphasized that institutional investors purchasing XRP understood that they were investing in the token based on Ripple Labs’ efforts, a critical aspect of the Howey Test.
Why Does It Matter?
This ruling has significant implications for the cryptocurrency community, especially considering the current SEC crackdown on platforms like Binance, Coinbase, and Kraken for the sale of unregistered securities. However
