In a groundbreaking development, a judge ruled that XRP is not considered a security in the Securities and Exchange Commission’s (SEC) case against Ripple. This ruling has significant implications for the future of XRP and the broader crypto industry.
On July 13, 2023, Ripple Labs won against the SEC, and XRP was declared to not be a security.
The company achieved a notable win in the United States District Court in the Southern District of New York when Judge Analisa Torres issued a partial ruling in favor of the company. This ruling pertained to a case brought against Ripple by the Securities and Exchange Commission (SEC) that dates back to 2020.
It’s official, Ripple’s token (XRP)is not a security
Based on documents filed on July 13th, Judge Torres granted summary judgment in favor of Ripple Labs.
The ruling clarified that the XRP token should not be considered a security, specifically in relation to its programmatic sales on digital asset exchanges.
However, the SEC also secured a victory of its own as the federal judge determined that XRP qualified as a security when sold to institutional investors. This classification was based on the conditions outlined in the Howey Test.
The SEC’s lawsuit aimed to compel Ripple to cease offering its XRP token, arguing that it qualified as a security and, therefore, required additional regulatory measures.
According to court documents, the motion for summary judgment by the defendants has been granted for Programmatic Sales, Other Distributions, and the sales made by Larsen and Garlinghouse. However, it has been denied for Institutional Sales.
This means that the XRP token is not considered a security when sold through retail digital asset exchanges.
After this news broke, the price of XRP surged from $0.45 to $0.61 within a few minutes.
The legal case against Ripple began in December 2020 when the Securities and Exchange Commission (SEC) filed a lawsuit against Ripple and its two top executives, Brad Garlinghouse and Chris Larsen.
The SEC alleged that the company was offering an unregistered security.
Throughout the past three years, the case has been filled with dramatic twists, including the release of the “Hinman Documents” and Garlinghouse’s ongoing defiance in response to the SEC’s accusations.
In addition to the noticeable price movement of the XRP token following this news, the general sentiment within the cryptocurrency community seems to be one of celebration and joy.
XRP’s non-security status
Ripple CEO Brad Garlinghouse is confident that the United States Securities and Exchange Commission (SEC) will face a lengthy process before being able to appeal the recent ruling in its case against Ripple Labs.
During an interview with Bloomberg on July 15, Garlinghouse downplayed the significance of the ruling regarding institutional sales, referring to it as “the smallest piece” of the overall lawsuit. He expressed his belief that if the SEC were to appeal the ruling on retail sales, it would only serve to reinforce Judge Torres’ decision.
Despite acknowledging that it may take a considerable amount of time before the SEC can file an appeal, Garlinghouse firmly stated his belief in the current legal status of XRP: “Based on the current law of the land, XRP is not classified as a security. Given the lengthy process required for the SEC to file an appeal, which could take years, we maintain a high level of optimism.”
Garlinghouse emphasized that this marks the first instance where the SEC has faced a setback in a “crypto case.” He openly criticized the SEC, referring to them as “bullies” who target players in the crypto industry unable to mount a strong defense.
We said in Dec 2020 that we were on the right side of the law, and will be on the right side of history. Thankful to everyone who helped us get to today’s decision – one that is for all crypto innovation in the US. More to come.
He highlighted the initial response of various U.S. crypto exchanges when the lawsuit against Ripple was initially filed.
Many took a cautious approach, waiting to observe the outcome due to the uncertainty surrounding the case. Consequently, exchanges such as Coinbase and Kraken decided to delist XRP entirely.
Garlinghouse accused the SEC of deliberately creating confusion in the market. He claimed that the SEC was aware of the existing confusion and intentionally engaged in actions that further exacerbated the situation.
According to Garlinghouse, this deliberate confusion was a means for the SEC to exert its power, hindering innovation within the United States. He criticized the SEC for prioritizing power and politics over the establishment of clear regulatory frameworks, resulting in difficulties for entrepreneurs and investors seeking to participate in the U.S. crypto market and blockchain industry.
After recently suing Binance, the SEC now targets Coinbase for allegedly operating as an unregistered securities exchange, adding to regulatory scrutiny in the crypto industry.
The U.S. government’s finance watchdog, the Securities and Exchange Commission (SEC), is suing Coinbase. Coinbase is a big company in New York that trades cryptocurrencies like Bitcoin.
The SEC says that Coinbase should have registered as a broker, national securities exchange, or clearing agency, but they didn’t.
This registration helps keep trading fair and transparent.
Also, the SEC claims that Coinbase has been selling certain cryptocurrencies that it shouldn’t have. These include Solana, Cardano, Polygon, Filecoin, The Sandbox, Axie Infinity, Chiliz, Flow, Internet Computer, Near, Voyager Token, Dash, and Nexo. According to the SEC, these count as securities, and you need special permission to sell them.
Today we charged Coinbase, Inc. with operating its crypto asset trading platform as an unregistered national securities exchange, broker, and clearing agency and for failing to register the offer and sale of its crypto asset staking-as-a-service program.https://t.co/XPG2gDkxtVpic.twitter.com/hCdVMw8B2v
— U.S. Securities and Exchange Commission (@SECGov) June 6, 2023
The lawsuit also says that Coinbase has been working like a broker for securities since 2019 without the needed registration. This is two years before they first started offering public shares in April 2021.
The SEC says that Coinbase’s staking program is also a problem. This program involves five different cryptocurrencies. According to the SEC, this makes the staking program an investment deal and counts as a security. Coinbase has been arguing with the SEC about this, saying its staking products are not securities. They keep arguing even though Kraken, another crypto company, settled with the SEC and stopped offering staking services in the U.S.
Gary Gensler, the head of the SEC, spoke about the lawsuit against Coinbase. He said Coinbase had not given its customers enough protection against scams and manipulation. They’ve also not been open about conflicts of interest. Gurbir Grewal, who is in charge of enforcing SEC rules, said that Coinbase knew they were breaking federal securities laws, but they did it anyway.
After the SEC announced its lawsuit on June 6, the price of Coinbase’s shares fell by 15% before trading started.
The SEC’s lawsuit against Coinbase happened just one day after they also sued Binance. Binance is another crypto company that the SEC accuses of breaking securities laws and mixing up customers’ money. Binance is in trouble for breaking 13 different securities laws.
The U.S. Securities and Exchange Commission (SEC) has charged Binance, the world’s largest crypto exchange, and its founder, Changpeng Zhao. They’re accused of mixing up billions in user funds and sending them to a Zhao-controlled company in Europe.
The SEC says Zhao and Binance dodged their own rules to let rich U.S. investors keep trading on Binance’s unregulated international platform. It’s even claimed that an executive admitted the company acted as an unlicensed securities exchange in the U.S.
The lawsuit also suggests that Binance.US was created to protect Binance and Zhao from legal issues. Two former Binance.US CEOs, likely Catherine Coley and Brian Brooks, raised concerns about Zhao’s control over the company.
Between 2018 and 2021, Binance made $11.6 billion, mostly from transaction fees. The SEC claims that Binance knowingly had many U.S. customers and didn’t act, even though it’s against federal law to offer and sell unregistered securities. Binance’s compliance efforts in 2019 were mostly for show, according to the SEC.
Lastly, the SEC accuses Zhao of setting up a plan to help rich customers evade regulations using a VPN service to hide their location and fake compliance documents to cover their tracks.
Coinbase is a publicly traded company
But people in the crypto industry are confused about the lawsuit against Coinbase. This is mainly because Coinbase is a company that has publicly traded shares.
Binance’s boss, Changpeng Zhao, responded to the lawsuit against Coinbase by teasing the SEC.
If you have to pick a fight with everyone, maybe you are the one at fault. 🤷♂️
Paul Grewal, the top lawyer at Coinbase, said that the SEC’s focus on punishing rather than setting clear rules for digital assets is bad for U.S. business. He said we need new laws that create fair and clear rules for everyone instead of lawsuits. But for now, Coinbase will keep doing business as usual.
“The solution is legislation that allows fair rules for the road to be developed transparently and applied equally, not litigation. In the meantime, we’ll continue to operate our business as usual.”
A lot of people in the crypto community are wondering how Coinbase could have gone public in 2021 if it was acting like an unregistered securities broker.
The CEO of Kraken, Jesse Powell, has accused U.S. regulators of enabling “bad actors” in the cryptocurrency industry to grow to an enormous size at the expense of legitimate players.
In a recent tweet, Jesse Powell, present a personal idea about the true intentions of the regulators:
I have a theory: Regulators let the bad guys get big and blow up because it serves their agenda.
1. destroy capital/resources in crypto ecosystem 2. burn people, deter adoption 3. give air cover to attack good actors
Jesse Powell has claimed that regulators, including the Securities and Exchange Commission (SEC), are allowing crypto companies to operate without enforcement actions as a distraction from their real targets.
Many of the respondents agree and offer personal perspectives on why the regulators are more interested in pursuing their secret politics than in offering a safe investment environment for individuals.
Powell argues that this could lead to the destruction of the industry by allowing bad actors to dominate the market, while legitimate players are forced to compete for dwindling resources. According to Powell, regulators will simply jail violators later after the damage has already been done.
Jesse Powell, the CEO of Kraken, has claimed that U.S. regulators are favoring “bad guys” over “good guys” in the cryptocurrency industry and that the legitimate players are being treated as enemies. Powell warned that if the bad actors are allowed to run unchecked, they could potentially wipe out the legitimate players. Powell made these statements after Kraken settled with the SEC by agreeing to discontinue staking services and pay a $30 million settlement.
Many in the crypto community have criticized the SEC for its “regulation by enforcement” approach, which has also targeted celebrities endorsing tokens on social media.
In September 2022, Powell announced that he would be stepping down as CEO and transitioning to the position of chair of the board, while Kraken’s chief operating officer, Dave Ripley, would take over as CEO.
Meanwhile, Paxos is also reportedly facing SEC enforcement action for alleged violations of investor protection laws related to the Binance BUSD stablecoin.
SEC vs Kraken’s crypto staking option
Following the settlement with Kraken, Gary Gensler, the Chair of the United States Securities and Exchange Commission (SEC), has issued a warning to other cryptocurrency companies to comply with the law.
Gensler emphasized that crypto exchanges must register with the SEC to operate within the regulations of the U.S. He claimed that many companies in the industry are deliberately avoiding registration. Gensler pointed out that the business models of many crypto projects are full of conflicts and urged them to separate bundled products. Gensler stressed the need for time-tested rules and laws to protect investors and prevent companies from misusing their customers’ funds. He warned companies against having their “hand in the customer’s pocket.”
Gensler made this statement in response to the SEC’s settlement with Kraken, where the exchange agreed to cease staking services and programs for its U.S. customers and pay a $30 million settlement.
Kraken announced that it would still offer staking services to non-U.S. users through a subsidiary.
The SEC’s actions have been met with criticism from many in the industry, who argue that firms are being punished for operating in a regulatory environment with unclear guidelines.
SEC Commissioner Hester Peirce has criticized the regulator’s actions, calling them “lazy and paternalistic,” and pointing out that the staking program had been beneficial to its users.
