U.S. Court Rules XRP Not Classified as Securities, but Finds Ripple’s Sale of XRP to Institutional Investors Violated Securities Laws

In a landmark decision, a U.S. court has ruled that Ripple’s XRP, sold to the public through a cryptocurrency exchange, is not a security. The ruling deals a blow to the Securities and Exchange Commission (SEC), which has maintained that most coins should be classified as securities. However, the court also ruled in favor of the SEC, stating that Ripple’s sale of XRP to institutional investors violated securities laws. The court’s decision acknowledges the effectiveness of the Howey test, a criterion for determining securities.

The lawsuit between Ripple and the SEC has been a protracted legal battle, lasting three years. Founded in 2012, Ripple was sued by the SEC in 2020 for selling $1.4 billion worth of XRP without complying with securities laws. The recent ruling by US District Judge Analisa Torres in New York marks the first phase of the Ripple lawsuit.

The court’s ruling stated that Ripple’s sale of $700 million worth of XRP to institutional investors violated securities laws. This decision was based on the Howey test, which determines whether an investment is a security by evaluating whether third-party efforts are expected to generate future profits. The court concluded that institutional investors were aware that Ripple Corporation was the seller of XRP and that Ripple’s efforts would drive the value of the coin, making it a security.

On the other hand, the court ruled that individuals who purchased XRP from cryptocurrency exchanges were not buying the coins directly from Ripple. These investors were not dependent on Ripple’s efforts to increase the value of XRP. As a result, the court determined that the remaining $700 million worth of XRP sold through cryptocurrency exchanges are not subject to securities laws.

One of the key points in the court’s ruling was the distinction between institutional investors and ordinary investors. The court noted that ordinary investors lacked access to the information presented by Ripple to boost the value of XRP, and therefore, their purchases of XRP through exchanges did not fall under securities laws.

The SEC has welcomed the court’s ruling on Ripple’s violation of the Securities Act, despite the collapse of its claim that all coins are securities. The SEC spokesperson, Scott Schneider, stated that the court’s finding that Ripple’s token sale was an investment contract security affirms the SEC’s position. However, the SEC has hinted at the possibility of appealing the decision.

Ripple CEO Brad Garlinghouse, expressed satisfaction with the court’s decision, claiming that they have been on the side of the right law and history throughout the lawsuit. Garlinghouse thanked those who supported Ripple and highlighted the importance of cryptocurrency innovation for America.

Legal experts have noted the significance of the ruling, with potential implications for how digital assets are classified. The court’s decision could reduce the SEC’s enforcement reach over cryptocurrency exchanges if it is cited in other courts, particularly at the appellate level. However, the ruling also raises questions about the SEC’s regulatory framework and its classification of coins sold on exchanges as unregistered securities.

While the court recognized the Howey test as a standard for determining securities, it did not universally apply it, suggesting the emergence of new laws to regulate cryptocurrencies. This ruling signals a need for clearer legislation surrounding digital assets.

SEC Chairman Gary Gensler’s stance on cryptocurrency regulation has been shaken by this decision. The SEC has been advocating for increased regulation within the existing legal system. However, legislative efforts to strengthen the Commodity Futures Trading Commission (CFTC) are already underway, reflecting a growing recognition of the need for comprehensive regulation.

Although Ripple emerged victorious in the first phase of the lawsuit, the court’s decision did not address the innocence of co-founders Brad Garlinghouse and Chris Larsen. Their involvement in the institutional sale of XRP will be dealt with in a formal trial. While the SEC suffered a setback, it is likely that they will pursue legal action against the two individuals to protect their reputation.

As the legal battle between Ripple and the SEC continues, the outcome of this case will shape the future of cryptocurrency regulation in the United States. It remains to be seen whether the court’s ruling will be upheld on appeal and how it will influence the broader regulatory landscape surrounding digital assets.

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