When December 2020 arrived, the U.S. Securities and Exchange Commission (SEC) filed a lawsuit against Ripple Labs, the company behind XRP, and its executives, alleging that they conducted an unregistered securities offering by selling XRP worth $1.3 billion. Ripple, on the other hand, denied the claims that XRP, a token developed to facilitate cross-border payments, is a security. We can say that Ripple's lawsuit with the SEC revolved around whether the company's XRP sales constituted an unregistered securities offering that took place years ago.
On Thursday, July 13, 2023, Judge Analisa Torres of the Southern District of New York brought the long-running Ripple case with the SEC to a significant turning point. In her ruling, the judge determined that XRP is not a security. Indeed, Torres concluded that Ripple did not violate federal securities laws by selling its cryptocurrency XRP on exchanges. However, she classified the sales to institutional investors as securities. We can say that Ripple achieved a partial victory in the 34-page ruling.
After approximately three years of legal battles, the summary judgment is considered a precedent for future token classification cases.
In the court documents, Judge Torres stated, "Ripple's Programmatic Sales, other distributions, and Larsen and Garlinghouse's XRP sales do not constitute an investment contract." Following the court's decision on XRP, Ripple CEO Brad Garlinghouse tweeted the following:
"In December 2020, we said we were on the right side of the law, and history would prove that. Thanks to everyone who contributed to this ruling, which applies to all crypto innovations in the US. More to come, let's start planning the party."
Ripple's Chief Legal Officer, Stuart Alderoty, also made the following statement regarding the matter:
"Today is a big win. XRP is not a security under the law. Sales on exchanges are not securities either. Sales by executives are not securities. Other XRP distributions are not securities. The only thing the court found to be an investment contract was the direct sales to institutional customers in the past. According to the court's decision, there may be further litigation related to these institutional sales."
Alderoty clarified some statements in the decision. According to him, Ripple's only concern with the court is that the order applies solely to the institutional sales.
An SEC spokesperson stated that the agency is reviewing the decision. The statement mentioned, "We are pleased the court found that XRP tokens were offered and sold by Ripple in violation of the securities laws in certain circumstances."
SEC Chairman Gary Gensler expressed "disappointment" with the court's decision that Ripple Labs did not violate federal securities laws by selling the XRP cryptocurrency in the US.
Previously, the SEC had filed lawsuits against crypto asset platforms Binance and Coinbase, accusing them of violating securities laws. While some experts believe the recent Ripple case ruling may not be legally binding, they speculate it could have an impact on the outcome of the SEC's lawsuits against Binance and Coinbase. Coinbase's Chief Legal Officer, Paul Grewal, tweeted, "I love being a lawyer most days. Today is one of them.
Did the Hinman documents have any impact on the obtained ruling?
The real impact of the Hinman documents on Ripple's legal victory remains uncertain. In 2021, Ripple requested the disclosure of communication and correspondence within the SEC related to the Hinman speech. In response, the SEC requested the court to seal the Hinman speech documents in December 2022. The sealing request filed by the SEC on December 22nd included various pieces of information and documents, including those related to the Hinman speech. The SEC cited reasons such as internal confidentiality, personal privacy, and the "privacy act" protecting government agencies for their request. However, the court ultimately ruled that the Hinman Documents would not be kept sealed. The Hinman Speech documents referred to a speech given by William Hinman, the former Director of the SEC's Division of Corporation Finance, in June 2018 at the Yahoo Finance All Markets Summit, where he stated that Ethereum was not considered a security.
How will the process continue?
There are various speculations about the SEC appealing the decision. According to SEC Regional Director Marc Fegel, Ripple's celebration might be short-lived. Fegel claimed on his Twitter account that the court's decision could be reversed from a securities perspective. He stated that if both parties appeal, the SEC would have the advantage. Legal expert Bill Morgan also mentioned the possibility of an appeal. Morgan suggested that Ripple might contest the sales aspect. Additionally, he added that this could potentially lead to a settlement between both parties.
Ripple's CEO, Garlinghouse, on the other hand, expressed that the SEC appealing would be a waste of time. In a statement to Bloomberg, Garlinghouse said, "Legally, the current law is clear that XRP is not a security. Until the opportunity arises for the SEC to appeal, which could take years, we are very optimistic.
Is there an increase in institutional interest in XRP?
Ripple believes that the legal clarity obtained from its recent victory against the SEC could open doors for institutional interest in XRP. According to a report by Cryptoslate, Stuart Alderoty expressed his optimism that Ripple's partial victory against the SEC could encourage U.S. banks and other financial institutions to embrace XRP. Alderoty made the following statement regarding the matter:
"We hope this decision gives comfort to financial institution customers or potential customers to at least come and talk to us... and hopefully some of those conversations turn into real business."