XRP wins?

The XRP case has been going on since December 2020 when the US Securities and Exchange Commission (SEC) sued the issuing company, Ripple Labs, and two executives of the exchange. The accusation was that by selling XRP tokens, they were selling unregistered securities, which is illegal in the US.

The court case against Ripple, the issuer of XRP, finally has progress. A summary judgment is basically when a jury or judge decides what the facts are of a case before it goes to full trial. This often can avoid a full trial, unless it is appealed or if the summary judgment determines that laws were broken.

In this case, the summary judgment did determine that Ripple Labs and the executives traded unregistered securities. But there are important nuances that we’ll get into below. So, the case will go to trial to decide what the consequences for the company will be. It is likely that someone will try to appeal this decision, especially since it looks particularly bad for the SEC, which keeps trying to claim cryptocurrencies are securities (more details below).

Overall, the results of this judgment were mixed but generally good news for crypto traders.

What is a security was determined by what could be considered an investment contract, versus what could not. An investment contract was defined as an understanding between the buyer and the seller that the seller would use the sale to boost the value of XRP:

Let’s break down what the overall ruling was.

What WAS a security:
- XRP sold in institutional sales
- sale of XRP used as a fundraiser
- Ripple founders sold their XRP for profit
- A total of $700M+ of transactions

What WAS NOT a security:
- XRP itself as an asset
- XRP purchased on exchanges
- Ripple employees paid in XRP

Simply put, the company is in trouble, but the asset itself and the general public who purchased it are not in trouble. In response, various exchanges have already relisted XRP for people to buy and sell.

By extension, this ruling seems to say that any transaction considered a “blind bid/ask” cannot be considered a security. A “blind bid/ask” is when the buyer or seller does not know who they are buying from or selling to. This would extend to all crypto assets purchased on exchanges (centralized and decentralized) wherein the other party is not known.

Does this extend to peer-to-peer (P2P) transactions though? Actually, we don’t know. The ruling specifically states that it will not rule on whether or not secondary sales (including P2P) are investment contracts:

What could be problematic for the industry is if a business paying its employees in a crypto asset makes it a security. This ruling seems to say that it does not, but the fact that P2P has been left out leaves a bit of a grey area. That would be less than ideal as it could be extended to institutions like DAOs, crypto and web3 companies in general, freelancers, and any ICO that pays out to an early group of builders/supporters/etc. Essentially, we might have to ask what it means for someone to receive crypto from someone else, and what specific activities can be considered work or employment. That could lead to some strange legal cases, similar to what was seen in The DAO ruling that seemed to suggest DAOs are companies, and more recent rulings that agree.

But keep in mind that this conclusion is not binding beyond this specific Ripple case. Having said that, this decision seems to say that an asset itself isn’t necessarily a security but rather how it is used can be considered a security. That’s an interesting distinction that we will have to see how it plays out as the case proceeds, and as other courts assess similar cases. Needless to say, the SEC is not particularly happy about this.

The market is happy, though, as XRP gained almost 57% within 24 hours and made it to number 5 of the top cryptocurrencies by market cap, surpassing USDC, Solana, MATIC, and many others. Other alt-coins are also pumping on the news. I guess we’ll take the win while we can, even if the decision is appealed or doesn’t have as far-reaching consequences as we expect.

- Theodore

P.S. We’re testing out a new email provider, let me know if you like/dislike it!