Cryptocurrency companies won a court victory this week as they resisted US regulatory oversight, arguing that digital assets are not securities. On Thursday, Ripple Labs received a landmark ruling from a federal judge that said some of the company’s XRP token sales are not subject to securities laws.
What did Judge Ripple say?
US District Judge Analisa Torres in New York found that some of Ripple’s digital token sales did not violate the law as alleged by the US Securities and Exchange Commission. Ripple was sued by the SEC for conducting an unregistered offering of $1.3 billion in XRP between 2013 and 2020.
Torres ruled that Ripple’s sale on a public exchange to retail investors was not an offer of securities under the law because the purchasers had no reasonable expectation of profit related to Ripple’s efforts.
Those sales were “blind bid/ask transactions,” they said, in which buyers “couldn’t know if their money went to Ripple or any other seller of XRP.”
This is the biggest win for a cryptocurrency company in a case brought by the SEC. The regulator had a partial victory as Torres ruled that Ripple violated securities laws when it sold XRP directly to sophisticated investors such as hedge funds.
What does sec allege?
The regulator has brought more than 100 enforcement actions against crypto companies that claim digital assets are securities.
This year brought the biggest case. Coinbase, the largest US cryptocurrency platform, has allowed users to trade at least 13 crypto assets that must be registered as securities, including tokens such as Solana, Cardano and Polygon, the SEC said. Coinbase has denied the allegations.
Industry players have insisted that most cryptocurrencies, which run on a database shared across a network of computers known as a blockchain, do not fit the US legal definition of securities. They say the SEC is vague and inconsistent and has called for new regulations or rules.
What is a ‘security’ under US law?
Crypto assets are securities, citing a 1946 US Supreme Court case involving investors in Florida orange groves owned by the WJ Howie Company.
The court ruled that “an investment of money in a common enterprise that profits solely from the efforts of others” is a type of security called an investment contract.
The court held that the SEC had the authority to prevent Howie from selling partial land interests to out-of-state investors with an agreement to pay profits from the harvest.
Securities, unlike assets such as commodities, are strictly regulated and require detailed disclosures to inform investors of potential risks.
What did the other judges say?
Many of the SEC’s crypto-related cases have ended in settlements, with companies paying fines and agreeing to comply with US law or exiting the US market.
Prior to the Ripple decision, judges in some cases decided by the court agreed with the SEC that certain crypto assets were securities.
Statements by developers linking the value of their digital assets to their efforts to grow or maintain related blockchain systems show that investors’ profits depend on the “efforts of others.”
The courts also decided that the investors in those assets participated in a “common enterprise” because the token issuer collected the funds they spent and developed the relevant systems.
What about Bitcoin?
Bitcoin isn’t considered a security because its anonymity and open-source origins mean investors’ profits don’t depend on the efforts of developers or managers, said Carol Goforth, a law professor at the University of Arkansas.
Some blockchain projects have attempted to finance their operations in two stages by offering securities under SEC regulations and then issuing or selling cryptocurrency to those investors after building a functional blockchain.
Goforth said the developers hope the approach will remove the “common enterprise” element, but she added the SEC has never specified what it takes to convert a security to a non-security.
(Reporting by Jodi Godoy in New York and Tom Hales in Wilmington, Delaware; Editing by David Gregorio)