Ripple's XRP Token Sales Ruling: A Landmark Victory for Cryptocurrency Companies

 Ripple's XRP Token Sales Ruling: A Landmark Victory for Cryptocurrency Companies

Ripple's XRP Token Sales Ruling(Image-Getty)

Cryptocurrency companies, which have been resisting U.S. regulatory oversight by claiming that digital assets are not securities, achieved a significant court victory recently. Ripple Labs, in particular, received a landmark ruling from a federal judge stating that some of the company's XRP token sales were not subject to securities laws.

The ruling was made by U.S. District Judge Analisa Torres in New York, who concluded that certain digital token sales by Ripple did not violate the law as alleged by the U.S. Securities and Exchange Commission (SEC). The SEC had sued Ripple for conducting an unregistered offering of $1.3 billion worth of XRP between 2013 and 2020.

Judge Torres determined that Ripple's sales of XRP on public exchanges to retail investors did not qualify as offers of securities under the law. This was because purchasers did not have a reasonable expectation of profit tied to Ripple's efforts. The judge described these sales as "blind bid/ask transactions" in which buyers could not ascertain if their payments went to Ripple or any other seller of XRP.

This ruling marks a significant victory for a cryptocurrency company in a case brought by the SEC. However, the SEC did secure a partial victory as Judge Torres also concluded that Ripple had violated securities laws when it sold XRP directly to sophisticated investors such as hedge funds.

The SEC has been alleging that digital assets are securities and has initiated over 100 enforcement actions against crypto companies. In a notable case, the SEC claimed that Coinbase, the largest U.S. cryptocurrency platform, allowed the trading of at least 13 crypto assets that should have been registered as securities, including tokens like Solana, Cardano, and Polygon. Coinbase denied these allegations.

Industry players have consistently argued that most cryptocurrencies, which operate on a shared blockchain network, do not meet the legal definition of securities in the United States. They contend that the SEC's approach has been ambiguous and inconsistent, calling for new regulations or laws to address these concerns.

Under U.S. law, the SEC defines securities based on a 1946 U.S. Supreme Court case involving investors in Florida orange groves owned by the W. J. Howey Co. The court ruled that an "investment of money in a common enterprise with profits to come solely from the efforts of others" qualifies as an investment contract, which is a type of security. Securities are subject to strict regulations and require detailed disclosures to inform investors of potential risks, unlike commodities.

Previous court decisions in the few crypto-related cases that reached trial supported the SEC's assertion that specific crypto assets were securities. These rulings emphasized that statements made by developers, linking the value of their digital assets to the growth or maintenance of associated blockchain systems, demonstrated that investor profits were dependent on the "efforts of others." Courts also concluded that investors in these assets participated in a "common enterprise" since their funds were pooled by the token issuer for the development of relevant systems.

Bitcoin, however, is not considered a security due to its anonymous and open-source origins, which means that investor profits are not reliant on the efforts of developers or managers. According to Carol Goforth, a law professor at the University of Arkansas, some blockchain projects have attempted to fund their operations in two stages. They first offer securities under SEC regulations and then provide or sell cryptocurrency to these investors once a functional blockchain is established. Goforth mentioned that developers hoped this approach would eliminate the "common enterprise" element. However, the SEC has not clarified the criteria for converting a security into a non-security.