xrp is not a security ripple labs

XRP is Not a Security, but Ripple’s Actions Still Face Legal Consequences

3 min read

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In a ruling of just a few hours ago, a US  judge, Analisa Torres, deemed that the cryptocurrency XRP, owned by Ripple Labs, does not meet the requirements to be classified as an investment contract under the Howey Test. Yes, XRP is not a security.

The XRP cryptocurrency, a product of Ripple Labs, has been in a monumental battle with United States Securities and Exchange Commission (SEC), in a case that has dragged on for years. All of the cryptocurrency industry has been watching the case, because the outcome would affect every other cryptocurrency and exchange (in the US, anyway).

If XRP was deemed a security, then it would need to be regulated by the SEC and it would make trading it a whole lot more complicated. Exchanges and platforms might have to delist the crypto (and other crypto as well) until XRP complied with regulations.

What this means

The crux of the matter lies in the SEC’s allegations that Ripple unlawfully amassed a staggering $1.3 billion (AU$1.9b) through an unregistered digital asset securities offering. Ripple Labs, however, vehemently disputed this claim, saying that XRP does not qualify as a security.

Central to the SEC’s determination of whether an asset is a security or not is the employment of the Howey Test, composed of four key criteria. If all four conditions are met, the asset is classified as a security, necessitating regulatory oversight.

Ripple Labs has maintained that XRP does not satisfy the Howey Test, so is not a security, and it doesn’t need regulatory intervention.

XRP is not a security

While XRP is not security, the legal battle is not over yet. The judge delivered a “split decision” on the case.

While the ruling stated that XRP itself is not considered a security, Ripple’s conduct related to the sale of XRP to institutional customers was found to be in violation of securities laws. This part of the ruling will probably complicate the regulation of cryptocurrencies (in the US, anyway) in the future.

The partial victory for Ripple Labs has sent the price of XRP rocketing upwards by 105% this morning.

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The SEC, on the other hand, is not getting an easy ride after its partial loss.

Institutional Sales of XRP Were Illegal

Judge Torres determined that Ripple’s sales of XRP to institutional investors were illegal securities offerings. Ripple sold approximately US$728.9 million (AU$1.05b) worth of XRP to these investors without registering them as securities, which is a violation of securities law. The reason that the sale of XRP was considered a security here is that the court found evidence that investors had agreed not to sell their XRP for a specific period of time.

Not being able to use Ripple’s token for anything other than a speculative investment during the lock-up periods contributed to the conclusion that the sales constituted securities offerings. The court also said that investment contracts explicitly stated that buyers were acquiring XRP for the purpose of resale or distribution.

This ruling has been highly anticipated within the cryptocurrency community, especially amid the SEC’s increased scrutiny of platforms like Binance, Coinbase, and Kraken.

XRP is not a security: Ripple Effect

Lachlan Feeney is the CEO of Labrys, Australia’s largest on-shore blockchain development agency. He said XRP’s win was an enormous blow for the SEC, because it disagrees with almost every argument they’ve made about these assets being a security.

“It’s far bigger than this one lawsuit against Ripple and its XRP token, though. The contagion effect could — and should — be significant, because it clearly asserts that their claims are not substantiated. Gary Gensler’s position seems to have been that every token, besides Bitcoin, is a security. Given Ripple’s background, if any token was going to be considered a security, it was going to be XRP. The fact that the judge has ruled that the XRP token itself is not a security is hugely significant, and could have an effect on the numerous other lawsuits the SEC is engaged in.

“There was one scenario in which XRP was deemed to be offered as a security when offered OTC. If Ripple accepts, they could still face substantial fines. However, the fact that the XRP price exploded nearly 100% post announcement is an indicator of how the market has reacted to the news. What’s more, for Coinbase — which is facing its own lawsuit for listing and trading Ripple and other tokens in the first place — to re-list XRP is very interesting, and reveals broader industry sentiment. There is a long way to go, though, with the potential for the SEC to appeal or settle.”