Beat the Case: The Significance of the XRP Case Ruling
Broader implications of the partial judgement ruling in SEC vs. Ripple case.
The XRP case is a groundbreaking ruling for Ripple and crypto as a whole. In 2020, the SEC sued Ripple over the launch and sale of the digital asset XRP. On the other end of the spectrum, Ripple and its steadfast community maintained that it was not a security. Crypto veterans recall that XRP was one of the largest traded assets during the bull run of 2017 and continued to attract a loyal and somewhat cult-like community.
Fast-forward to 2023, XRP, in a groundbreaking victory, was deemed not a security. The ruling is a monumental shift for the digital asset and the crypto world at large, as it could set a precedent in case law. Furthermore, it signals a progressive shift in societal sentiment regarding the United States' perception of crypto.
Page 15: "XRP, as a digital token, is not in and of itself a “contract, transaction[,] or scheme” that embodies the Howey requirements of an investment contract." - (SEC v. RIPPLE LABS, 2023)
Page 25 : "Ripple’s Programmatic Sales of XRP [on digital asset exchanges] did not constitute the offer and sale of investment contracts." - (SEC v. RIPPLE LABS, 2023)
Although the crypto space sees this as a huge win, the SEC did decide in a partial judgment that selling XRP to institutions was in fact a security contract.
The results of the case are important for a few reasons:
Signal to Project Teams leaving the US
United States incorporation is typically a point of contention for well-capitalized crypto project teams, where many teams decided to avoid the US in some capacity. Often incorporating semi-complex legal structures involving offshore entities or strict terms of service (TOS). These are not showy super coders or hedge funds holding funds offshore but teams aiming to limit their liability in a country without clear regulatory clarity towards crypto. Due to intense regulatory scrutiny, the United States has become a volatile place to launch digital assets. The SEC has picked off and sued multiple smaller crypto companies in the last year alone.
The ruling in the SEC vs. Ripple case signals to project teams that case law could potentially side with them in the event of a lawsuit. Although there are few projects as well capitalized as Ripple, it still sends a soft signal across the crypto space that they do have grounds to participate and build in the US. There still is a long way to go on this front, but a larger sentiment shift could be sooner than expected among project teams.
Increased Regulatory Comfort around ETH
ETH has been in the regulatory crosshairs recently since the SEC mentioned BTC is the only asset that is not a security. The case ruling could shed some light on what is a security and what is not, including Ethereum, which had an ICO bootstrapping event at its inception. SEC Chairman Gary Gensler postures around the "come register" narrative, which offers little feasibility for project teams. They also preach to politicians and other regulators, mainly those not native to crypto, which have adopted and propagated the "come register" notion, painting an anti-compliance narrative to the general public. Paradigm delves deeply into this in their three-part research papers.
XRP is not a security
It goes without saying that XRP, not being a security, is great for their ecosystem. Within the same day of the court filing multiple crypto exchanges that previously suspended trading, including Coinbase, reenabled trading.
Nature is healing
It is not over yet
Amidst all the excitement, virtual hugs, and bullish tweets, we are still not quite in the clear. The case resulted in a partial judgment, meaning an appeal could lead to a reversal. In fact, the SEC is already signalling that they will appeal.
“While persuasive, it's not binding precedent on other courts and will likely be appealed and could be reversed” - Crypto Lawyer, Stephen Palley
In addition, Ripple is a highly capitalized firm. In other cases, project teams have often settled and chosen to wind down to avoid costly and lengthy legal processes. Hopefully, a few more large big wins like Ripple can establish a basis for small projects in the future.
Conclusion
Last week was a great day in the crypto space, as some confidence was restored in the long-term feasibility of crypto sticking around for the long haul. With the case's conclusion, the United States has softly signaled that there is room for digital assets. At the same time, crypto project teams, investors, and users still need to keep a keen eye on the following stages of crypto regulation within the United States. Although countries have separate crypto jurisdictions, the United States plays a huge role in global shaping policy.
Not financial or tax advice. The purpose of this newsletter is purely educational and should not be considered as investment advice, legal advice, a request to buy or sell any assets, or a suggestion to make any financial decisions. It is not a substitute for tax advice. Please consult with your accountant and conduct your own research.
Disclosure. All of my posts are my own, not the views of my employer.
