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.
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.
The U.S. Treasury warns about DeFi. But they acknowledge that the majority of money laundering, terrorist financing, and proliferation financing still take place using fiat currency or outside the realm of cryptocurrency.
According to a recent report from the U.S. Treasury Department, it was observed that individuals from the Democratic People’s Republic of Korea, along with other fraudsters, were exploiting vulnerabilities of DeFi to facilitate money laundering. The report also stated that the majority of instances of money laundering, terrorist financing, and proliferation financing still took place using fiat currency or outside the crypto ecosystem.
The U.S. Treasury, in its “Illicit Finance Risk Assessment of Decentralized Finance” report, which was published on April 6th, stated that certain groups engaged in illicit activity from North Korea were able to take advantage of some DeFi platforms’ non-compliance with Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) regulations.
How illicit activity is performed on DeFi platforms
These actors utilize different tactics and services, such as exchanging virtual assets for other more manageable or less traceable virtual assets, using cross-chain bridges to swap virtual assets from other blockchains, sending virtual assets through mixers, and placing virtual assets in liquidity pools as a form of layering.
Although the money laundering process by malign actors remains the same, they may use new methods like chain hopping. Criminals find DeFi services more appealing than centralized VASPs as they don’t need to provide customer identification information.
Such laundering methods pose challenges for investigators tracing illegal proceeds, and actors typically use more than one technique, with a level of sophistication depending on their technical experience and familiarity with DeFi services. However, even lesser-skilled actors have been observed using some of these tactics, according to law enforcement.
Most of the time, they use:
- DEXs and cross-chain bridges to convert virtual assets. Illicit actors often use decentralized exchanges (DEXs) to exchange virtual assets, such as cryptocurrencies, into a different virtual asset. They may do this to exchange into a more liquid asset that has higher trading volumes and is easier to cash out into fiat currency. They may also exchange virtual assets for another virtual asset that is compatible with a cross-chain bridge, mixer, or other DeFi service or exchange for an asset that is less traceable. This allows them to move their funds between different blockchains and makes it more difficult for authorities to trace financial transactions.
- Virtual asset mixers to obfuscate transaction information. Criminals use virtual asset mixers to functionally obfuscate the source, destination, or amount involved in a transaction. Mixers pool or aggregate virtual assets from multiple individuals, wallets, or accounts into a single transaction. They may also split an amount into multiple amounts and transmit the virtual assets as a series of smaller independent transactions or leverage code to coordinate, manage, or manipulate the structure of the transaction. Mixing services may be advertised as a way to evade Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) requirements and rarely include the capacity and willingness to provide upon request to regulators or law enforcement the resulting transactional chain or information collected as part of the transaction.
- Placing illicit funds in liquidity pools to generate funds from trading fees. Illicit actors can place criminals’ proceeds in a DeFi service’s liquidity pool, where the assets provide liquidity to support trades on the service. By placing funds into liquidity pools, actors may generate funds from trading fees. Liquidity providers typically lock their virtual assets into the liquidity pool and may receive a portion of fees or some other type of return or interest created through the DeFi service. This allows bad actors to receive profits from their illicit funds without directly accessing them.
The report’s highlights
The report highlighted that inadequate AML/CFT controls and other deficiencies in DeFi services “facilitate the theft of funds.” Brian Nelson, the undersecretary of the Treasury for Terrorism and Financial Intelligence, pointed out that illicit actors, including criminals, scammers, and North Korean cyber actors, were utilizing DeFi services to launder illicit funds. To reap the potential benefits of DeFi services, addressing these risks is necessary.
However, the Treasury reaffirmed that most instances of money laundering, terrorist financing, and proliferation financing still took place using fiat currency or outside the digital asset ecosystem.
Officials recommended increasing regulatory supervision of AML/CFT for platforms offering DeFi services, providing guidance to DeFi platforms on AML/CFT, and addressing regulatory gaps.
The evaluation was conducted in compliance with an executive order on digital assets signed by President Joe Biden in March 2022. In response to the order, various U.S. government agencies have started examining the potential implications of different aspects of the digital asset space on the country’s financial system and payment infrastructure.
Recently, the Montana Senate passed a bill that aims to safeguard the interests of crypto miners operating within the state.
The proposed law is currently being reviewed by the Montana House of Representatives and seeks to eliminate discriminatory regulations that could hamper their mining operations, both for individuals and commercial entities.
The bill seeks to exempt digital assets used as payment from taxes, and allow home crypto mining that uses less than 1 megawatt of energy annually, except when it violates existing noise bylaws.
The proposed pro-crypto mining bill in Montana aims to remove any energy rate classification that hinders home crypto mining and digital asset businesses. Lobbyists and crypto companies have been working together for years to establish crypto-friendly laws in the state. Montana has high wind energy potential, but remote wind projects struggle due to the need for long transmission lines. However, the bill can be an early buyer of that power and help to bring customers (Bitcoin miners) to the state. There is a misconception that mining is bad for the grid or the environment is holding back the crypto-mining industry in the United States, despite it being a powerful tool for balancing the grid and cleaning up the environment.
Regulatory policies also fail to consider the positive aspect of this process. One of these would be the grid balancing concept.
Crypto mining is best suited for states with grid-balancing programs. These programs pay participants to lower their power consumption during times of high power prices or low supply. Miners can easily reduce their power consumption at any hour of the day, making them ideal participants in such programs.
What is the Montana pro-crypto bill?
The proposed bill seeks to establish a “right to mine digital assets” in Montana and prevent discriminatory electricity rates for crypto miners. The bill also protects “home” mining and removes local government’s power to use zoning laws to prohibit crypto mining operations.
Additionally, the bill prohibits extra taxes on the use of crypto as a payment method and categorizes digital assets as personal property, similar to stocks and bonds. The Montana Senate passed the bill on Feb. 23 with 37 for and 13 against, and it will now be presented to the House for approval. Finally, the bill will require the signature of Governor Greg Gianforte to become law, who may choose to veto it.
How Montana Could Benefit from Pro-Crypto Mining Bill
Proponents of the bill anticipate that Montana can attract mining companies by updating legislation, which will, directly and indirectly, boost the region’s economy.
Montana State Senator Daniel Zolnikov, the primary advocate of the bill, believes that Montana has a lot to gain by embracing the digital asset industry.
By permitting unrestricted crypto mining operations, Montana can potentially attract more businesses and investments from the cryptocurrency sector, creating jobs in rural communities.
Senator Zolnikov hopes that this move will signal to the larger digital asset industry that Montana welcomes their innovation and new companies into the state.
Sustainability Concerns Surrounding Montana’s Pro-Crypto Mining Bill
Despite optimism about the potential benefits of crypto mining, some are concerned about the impact on small towns and communities.
Colin Read, former mayor of Plattsburgh, New York, and SUNY economics professor, pointed out that mining companies often fail to deliver on their promises of job creation.
Additionally, an influx of crypto mining companies could cause energy and sustainability challenges, as seen in New York, which experienced skyrocketing retail energy rates due to increased demand.
As a result, the New York Public Service Commission introduced steeper energy tariffs for crypto miners to mitigate the issue.
Similar challenges have arisen in Texas, where crypto mining businesses have set up operations, leading to power grid overloading during extreme weather conditions.
In Montana, Missoula County has implemented requirements for crypto mining firms to either consume or generate enough renewable energy to cover 100% of their operations, responding to concerns about power consumption and pollution. These sustainability concerns underscore the importance of balancing the potential economic benefits of pro-crypto mining legislation with sustainable energy practices.
Montana’s weather conditions, including summer heat rising above 100 degrees Fahrenheit (38 Celsius) and sub-zero temperatures in winter, contribute to the state’s high per capita energy consumption rate. Due to environmental concerns surrounding the environmental impact of crypto mining, several American states have implemented laws limiting energy-intensive activities, such as placing caps on energy usage or restricting energy sources.
For instance, New York recently imposed a temporary ban on mining firms using non-renewable energy sources to reduce the state’s carbon footprint. Montana may face similar sustainability challenges if its pro-crypto mining bill is passed.
Senator Zolnikov addressed these concerns, stating that Montana already has an attractive energy mix for digital asset mining and that the bill aims to provide legal certainty for long-term operations. Montana has access to geothermal, wind, solar, and hydro energy sources, including the Missouri River and its tributaries, which are used to generate hydroelectric energy.
Will the pro-crypto bill pass?
Montana’s pro-crypto mining bill aims to attract more cryptocurrency mining businesses to the state, potentially bringing positive transformations. However, the bill’s approval could lead to initial sustainability challenges related to eco-friendly and sustainable energy.
While Montana presently has both renewable and non-renewable energy sources, the state’s response to emerging changes in the wake of the pro-crypto mining legislation will be crucial. Balancing economic benefits with sustainable energy practices will be a delicate balancing act for Montana.