In July 2023, a major legal decision was made in the long-running case between the U.S. Securities and Exchange Commission (SEC) and Ripple Labs regarding the status of XRP, Ripple’s cryptocurrency. Judge Analisa Torres issued a summary judgement, ruling that XRP, as a digital asset, is not inherently a security. This decision came after years of legal disputes, where the SEC alleged that Ripple’s sales of XRP violated securities laws.
The Key Points in Judge Torres’ Decision
Judge Torres‘ ruling was split into two parts. First, she determined that XRP itself is not a security, a decision that was seen as a major victory for Ripple. This means that owning or trading XRP on public exchanges does not, by itself, make someone a part of a securities transaction. The second part of her ruling focused on Ripple’s different methods of selling XRP. She concluded that Ripple’s sales of XRP through secondary trading platforms (such as cryptocurrency exchanges) did not qualify as securities transactions. However, Ripple’s direct sales of XRP to institutional investors, like hedge funds, did meet the definition of securities transactions under U.S. law.
This nuanced judgment left the case in a mixed position. While Ripple celebrated the decision regarding public sales, the SEC still secured a partial victory over institutional sales, which could impact the company financially and operationally.
The SEC’s Interlocutory Appeal and Judge Torres’ Rejection
Following Judge Torres’ summary judgment on July 13, the SEC moved quickly to file an interlocutory appeal on August 18, 2023. The SEC sought to challenge the court’s decision regarding Ripple’s sales on secondary trading platforms, arguing that these should be considered securities transactions. However, on October 3, 2023, Judge Torres rejected the SEC’s request. She ruled that the issues raised by the SEC did not present a “controlling question of law” with significant grounds for disagreement, which is the standard required for an interlocutory appeal to proceed.
The rejection of the appeal was a significant setback for the SEC, leaving them with limited options to continue pursuing their case against Ripple in its current form. Furthermore, after this denial, the SEC voluntarily dropped its charges against Ripple’s top executives, Brad Garlinghouse and Chris Larsen, further narrowing the scope of the case.
Ripple’s Penalty and the Appeal Speculation
Despite Ripple’s success in court, the company wasn’t entirely free from penalties. In a separate development in August 2023, Ripple was hit with a $125 million civil penalty and was issued a general injunction. This penalty effectively ended the nearly four-year-long legal battle, but it didn’t quell speculation about what the SEC’s next move would be.
In September 2023, Ripple made headlines again when it sought to secure a stay by placing 111% of the monetary judgment in a bank account. This action spurred further speculation that the SEC might still pursue an appeal, particularly regarding the court’s rulings on XRP’s classification.
Insights from SEC Veteran Marc Fagel
As legal analysts continue to debate the SEC’s next steps, SEC veteran Marc Fagel provided his perspective on the situation. Fagel, a former SEC regional director, offered insight into how the SEC might proceed in light of Judge Torres’ decisions and the recent developments. According to Fagel, if the SEC were to appeal, its focus would likely be on the programmatic sales of XRP, which the court ruled were not securities transactions. He believes that an appeals court could address this issue without needing to decide whether XRP, as an asset, is a security.
Fagel’s analysis suggests that the question of XRP’s status as a security, which was only briefly mentioned (or considered “dicta”) in Judge Torres’ ruling, is not likely to be a primary focus in any future appeals. Instead, he believes the SEC would try to focus on the sales practices of Ripple and whether those constituted securities transactions.
When asked if the SEC could directly challenge the court’s dicta on XRP’s security status, Fagel noted that it’s theoretically possible. However, he pointed out that the SEC has intentionally been vague on this issue in many of its cases, and it’s unlikely that the court of appeals would take up the question. In his opinion, this part of the ruling is peripheral and not essential to the core legal questions at hand.
What Happens Next?
While Ripple scored a significant victory with Judge Torres’ ruling, the case is far from over. The SEC may still appeal aspects of the decision, especially concerning the sale of XRP through secondary trading platforms. However, the path forward for the SEC is less clear, particularly after the rejection of their interlocutory appeal and the dropping of charges against Ripple’s executives.
The ongoing legal battles surrounding XRP are part of a broader trend of increased regulatory scrutiny of the cryptocurrency industry in the United States. The SEC has been aggressive in its pursuit of enforcement actions against companies it believes are selling unregistered securities, and the Ripple case is one of the most high-profile examples. However, as Fagel and other experts have pointed out, the specific legal questions around XRP and Ripple’s sales methods could shape the future regulatory landscape for other cryptocurrencies.
In conclusion, while Ripple’s fight with the SEC seems to be winding down, the case could still evolve. An appeal remains a possibility, but the ultimate question of whether XRP is a security may remain unresolved in the near term. For now, Ripple can count its recent victories, but the future of cryptocurrency regulation remains uncertain.
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