XRP wins temporary legal victory, what important information does the ruling reveal?

XRP wins a legal victory, what does the ruling reveal?

In December 2020, Ripple was sued by the U.S. SEC. After three years of legal battles, Ripple has finally achieved a “brief” victory.

Tonight, a U.S. federal judge ruled that Ripple’s sale of XRP tokens through exchanges and algorithmic programs does not constitute an investment contract (does not violate securities laws), but the court also supported the SEC’s motion that institutional sales of tokens do violate federal securities laws. The news caused XRP prices to soar from 0.473 USDT to 0.64 USDT, with the highest hourly increase exceeding 35%.

Final conclusion

In this ruling, neither SEC nor Ripple is truly a complete winner. There is currently no clear conclusion on whether XRP is a security.

However, the news was quickly spread and regarded as a major positive for the crypto market’s resistance to the SEC. Especially when crypto giants such as Coinbase and Binance are facing SEC lawsuits, casting a shadow over the entire crypto market, Ripple’s victory is particularly inspiring. The crypto community shouted that XRP’s small step is a big step for crypto.

Odaily Star Daily noticed some details worth noting in the court’s ruling.

First, the court supported part of the SEC’s motion, namely that Ripple’s institutional sales of tokens constitute unregistered offers and sales of investment contracts in violation of Section 5 of the Securities Act. The court made its judgment based on the three aspects of the Howey test:

  • The first step of the Howey test examines whether “investment of money” is part of the relevant transaction; the defendant does not deny that it paid money, so the court considers this element to be established.

  • The second step of the Howey test, namely whether there is a “common enterprise”; the court determined that there is a common enterprise, because the records show that there is an asset pool, and the fate of institutional buyers is linked to the success of the enterprise and the success of other institutional buyers.

  • The third step of the Howey test is to study whether the economic reality of the institutional sales of Ripple leads institutional buyers to have “a reasonable expectation of profits derived from the entrepreneurial or managerial efforts of others.” The court believes that a reasonable investor in the position of an institutional buyer would purchase XRP and expect to profit from Ripple’s efforts.”

Interestingly, the reason why the court ruled that Ripple’s sale of XRP tokens through exchanges and programs does not constitute an investment contract is because the programmatic sale does not meet the third prong of the Howey Test, which is a reasonable expectation of profits.

The court found that institutional buyers reasonably expected Ripple to use the funds it raised from the sale to improve the Ripple ecosystem and thereby increase the price of XRP. However, programmatic buyers could not reasonably expect the same result. “Ripple’s programmatic sales are blind sales and programmatic buyers do not know if their money is flowing to XRP or any other XRP seller. Since 2017, Ripple’s programmatic sales have accounted for less than 1% of the global XRP trading volume. Therefore, the vast majority of individuals who buy XRP from digital asset exchanges are not investing in Ripple. Institutional buyers purchase XRP directly from Ripple based on contracts, but the economic reality is that programmatic buyers are the same as buyers on the secondary market (i.e., exchanges) and do not know who their money is going to.”

(Content about programmatic sales)

Ultimately, the court ruled that Ripple’s programmatic sale of XRP does not constitute an investment contract and does not violate securities laws. The court also ruled that the use of XRP to invest in others, as well as for bounties, gifts, and transfers to executives, does not constitute an investment contract and does not violate securities laws.

The United States, as a maritime legal system, also provides a precedent for other cryptocurrency projects in the aftermath of the XRP case. In particular, the ruling that the programmatic sale of tokens does not violate securities laws also directly proves that the opening of token trading by exchanges does not violate securities laws, but it is best not to sell tokens through ICO/IEO and other forms, as this may be deemed to meet the conditions for institutional sales.

We will continue to follow the progress of the Ripple case.