Will the Ripple Decision Change the Cryptocurrency Industry?
A recent court decision out of the US Southern District Court of New York could hold major implications for blockchain developers, institutional investors, and potentially anyone exchanging cryptocurrency.
The Securities Exchange Commission (SEC) accused Ripple Labs, a blockchain developer and creator of XRP cryptocurrency, of selling over a billion dollars of XRP in an unregistered security offering. Projects within the cryptocurrency sector have largely been operating without significant oversight, thanks to the still somewhat unprecedented and emerging nature of the field. The SEC’s accusations and lawsuit against Ripple made headlines because a favorable decision for the SEC would potentially bring substantial changes and far-reaching consequences for every other player in the cryptocurrency market.
Companies wishing to raise capital from the public via the stock market are required to register with the SEC. Registration involves providing the company’s financial statements and disclosures to investors, but Ripple did not file a registration with the Commission prior to selling over $1.3 billion of XRP to the public in 2013. The lawsuit alleged that Ripple and two of its executives had chosen to share only the information they felt was necessary, essentially creating a vacuum of information. Ripple’s stance was that XRP should not be treated as a security, thus giving the SEC no authority over its sale.
U.S. District Judge Analisa Torres ruled that approximately half of the XRP sales were not covered by SEC laws. The sales made to the public did not meet the criteria for securities, so that portion of Ripple’s cryptocurrency exchange was cleared in the lawsuit. However, the other portion, sales made to institutional investors, did qualify as illegal sales of securities. Judge Torres’ decision was a win and a loss for both the SEC and Ripple.
Monte Silver, an attorney specializing in U.S. business litigation and commercial disputes, predicts that “this is a significant moment that will define the crypto market.”
The full extent of how this ruling will guide the course of the cryptocurrency market is still unclear, as the SEC currently still has the option to appeal Judge Torres’ decision. The SEC’s partial win in the Ripple case could open the door to wider and more comprehensive control over the cryptocurrency market. As it stands, this case has established that the SEC holds authority over cryptocurrency sales to institutions.
The Commission has also set its sights on two other cryptocurrency platforms – Binance and Coinbase – by filing charges against them for the unregistered sale of securities, among other allegations. Since litigation of cryptocurrency matters is still relatively new in the legal field, only time will tell if the decision in Ripple sets a lasting precedent for upcoming cases.
The Ripple decision was not all bad news for the crypto industry, though. The judge ruled that cryptocurrency trades and exchanges among the public are not considered securities transactions, so the SEC has no control over such transactions.
According to the SEC, most cryptocurrency tokens qualify as securities because they are bought in the hopes of profiting from someone else’s efforts. Securities laws were written long before cryptocurrency was created, so the Commission has been relying on a 77-year-old Supreme Court case to assert its authority over crypto. This case, SEC v. Howey, is the namesake of the Howey Test, which is a method used to determine if a sale or transaction qualifies as an investment contract.
The Howey Test establishes that if money is invested into a common enterprise with the expectation that someone else’s efforts will generate a profit, then an investment contract exists and is a security. By applying the Howey parameters, it was determined that cryptocurrencies do not qualify as securities when they are sold to retail purchasers. The judge in Ripple explained her reasoning for this decision, stating that retail investors who purchased XRP on crypto exchange platforms had no way of knowing who the seller was because that information was not disclosed. Thus, these buyers could not depend on Ripple’s actions to impact the value of the XRP. The institutional investors, however, did have access to that information and could expect Ripple to generate an increased value of the XRP.
Securities laws like these, along with numerous other federal regulations, can create an oppressive atmosphere that many non-US-based businesses prefer to avoid at all costs. The law firm of Silver & Co. specializes in representing companies headquartered outside the U.S. that need trusted legal representation for litigation and disputes within the U.S. We have a track record of successfully representing our clients in their legal battles against large multinational corporations, the U.S. government, real estate investment promoters, and debtors.
Silver & Co. exclusively represents businesses located outside the U.S. with regard to their litigation in the United States. If you are a party to a dispute in the U.S., you must obtain legal representation that protects and fights for your interests.
If you are a business or individual located outside the U.S. and either (i) are a crypto investor with a case against a company or (ii) a crypto company facing a lawsuit from an investor or holder of cryptocurrency, contact our office for a free consultation.