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After a crucial legal judgment on Thursday, one of crypto’s greatest arguments — what should and shouldn’t classify as a security in the eyes of US regulators — looked hopeful for retail-facing projects. But, as with many things in the industry, the decision was not without controversy. A three-year legal battle between Ripple Labs, the Ripple blockchain’s developer, and the Securities and Exchange Commission has taken a major turn, with a federal judge ruling that the network’s XRP token was a security when Ripple sold it to institutional investors a few years ago — but not to the general public.
The main reason given by US District Judge Analisa Torres was that institutional investors were more likely to be aware of XRP’s securities-like characteristics when it was first pitched by Ripple, but so-called programmatic investors — those who buy XRP directly on a crypto exchange, like retail traders — weren’t. Both Ripple and the SEC would see this outcome as a potential triumph, as it lends validity to either side’s security-or-not argument.
However, projecting Ripple’s decision as a positive for the rest of the crypto market is a bit harder. To begin, the selection was based on how well retail investors understood cryptocurrency years ago, over a time span that ended in 2020. Bitcoin was worth a fraction of what it is now, and regulators were just starting to form opinions about the area, which has obviously altered.
Some interpret this early ruling to suggest that Coinbase and others accused of listing possible securities may now be clear, at least in terms of general public purchases on their exchanges. However, while the potential disruption of forcing retail-facing enterprises to register or change their business model may be avoided, it is only one side of the equation.
The Ripple case is far from over
Many successful cryptocurrency projects these days rely on early token sales to institutional investors and venture capitalists prior to their public launch to get off the ground, frequently pre-registering their efforts with regulators to avoid any potential ramifications. Many of the potential securities on the SEC’s list had engaged in these types of agreements, and the SEC highlighted those examples as reasons why the tokens should fall within its purview. With Thursday’s decision, that form of pre-funding may be done, unless VCs choose to buy on the open market when prices are as volatile as everyone else’s.
It should be emphasized that the SEC’s crypto-related to-do list is growing by the day. The watchdog was one of four authorities to file accusations against bankrupt cryptocurrency lender Celsius and its former CEO Alex Mashinsky earlier on Thursday, and it faces a protracted sequence of court hearings and trials in connection with its allegations against exchanges such as Binance and FTX. (Mashinsky has refuted the charges.)
The Ripple case is likewise far from over, with its own trial date planned for later this year. While cryptocurrency prices are surging across the board, there are enough uncertainties to create alarm in the sector.
“Over the course of the past year, we have worked quickly to get to the bottom of what led to Celsius’s collapse, to understand how a platform that advertised itself as the ‘safest place for your crypto’ could have left investors holding billions of dollars in losses. Today we have the answer,” said Damian Williams, US attorney for the Southern District of New York.
Ex-Celsius CEO Mashinsky is accused of inflating his company’s cryptocurrency in order to attract clients to the platform. (Mashinsky has disputed the claims.).