Regulation and Policy

SEC vs. Ripple: A New Development in the Ongoing Legal Battle

A new court ruling that might have a big impact on the cryptocurrency market has given the legal dispute between the U.S. Securities and Exchange Commission (SEC) and Ripple Labs, the blockchain developer and maker of the XRP cryptocurrency token, a new direction. The SEC filed a lawsuit against Christian Larsen and Brad Garlinghouse, two of Ripple's executives, in December 2020, alleging that they had raised over $1.3 billion through the continuous, unregistered sale of digital asset securities. The SEC asserted that XRP constituted security and that Ripple had broken federal securities laws by offering it for sale to the general public without first registering or obtaining an exemption.

Ripple, on the other hand, maintained that XRP is a utility token that enables cross-border payments rather than a security. Additionally, Ripple based its argument on prior remarks made by an SEC director in 2018, who claimed that Ether and Bitcoin were not securities. In addition, Ripple contested the SEC's case, arguing that there was insufficient "fair notice" that XRP and its dealings were governed by securities laws. The U.S. District Court for the Southern District of New York ultimately issued its much-anticipated decision on July 13, 2023, regarding the summary judgment motions filed by both parties. Different parts of each motion were granted and denied by Judge Analisa Torres in her split decision.

Three out of the four transaction types under consideration were determined by the court to not constitute investment contract securities, resulting in a ruling in favor of the defendants. Instead of considering the entirety of the circumstances for each type of transaction, the court applied the four-factor standard established by the Supreme Court in SEC v. W.J. Howey Co. (1946), rejecting the SEC's contention that XRP was a security in and of itself.