The three-year legal dispute between Ripple and the SEC is entering its final phase. The Southern District of New York's district court has ruled that the XRP token, as such, does not meet the requirements of the Howey Test and therefore should not be classified as a security. This decision marks a significant victory for the crypto industry.
In December 2020, the U.S. Securities and Exchange Commission (SEC) filed a lawsuit against Ripple, alleging that the company had offered an unregistered security to U.S. customers through the public sale of the cryptocurrency XRP. Over the years, the case has unfolded as a landmark legal battle, with Ripple sacrificing up to $200 million in legal fees. However, the costly fight has paid off. The U.S. judges responsible for the case rejected the SEC's motion, stating that the XRP token itself is not a security, as stated in a 34-page court document.
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XRP not to be classified as a security
The SEC filed its lawsuit in winter 2020 as a motion for summary judgment. This refers to a request made by one party in a legal case, asking the court to decide in their favor based on the evidence and arguments presented, without the need for a trial. In this case, the SEC argued that there were no genuine issues of material fact regarding the classification of XRP as a security and that the agency was entitled to a judgment as a matter of law. In response, Ripple filed a counter-motion.
Specifically, the U.S. court made the following decisions:
- The Securities and Exchange Commission's motion was partially granted and partially denied. Ripple's counter-motion was also partially granted and partially denied.
- The sales of the XRP token to the public ("Programmatic Sales"), salary payments in the XRP token ("Other Distributions"), and the sales by Ripple founders Chris Larsen and Brad Garlinghouse are not considered securities offerings.
- The sales of the XRP token to institutional actors are classified as securities offerings.
- Due to the rejection of the motion for summary judgment, the case will be finally decided in a separate court proceeding. The court will set a hearing date "in due course."
Implications for the crypto industry
The decision of the U.S. court not to classify the public offering of the XRP token as a security has far-reaching implications for the regulation of digital assets in the United States. For some time now, the SEC, under the leadership of Chairman Gary Gensler, has argued that a majority of cryptocurrencies, including XRP, should be classified as securities, bringing the sector under the authority of the agency. This stance has resulted in several lawsuits against leading crypto service providers such as Binance, Coinbase, Kraken, and others.
The SEC specifically mentioned over a dozen different cryptocurrencies as unregistered securities. Even Ether (ETH) was considered a potential candidate due to its staking mechanism. Until now, there has been no legal basis for these claims. The decision in the Ripple case provides the first judicial guidance on how to apply the Howey Test to digital assets. Thus, the final court proceeding will be groundbreaking for the industry.
