Ripple has triumphed in its important lawsuit against the SEC. And the consequences affect not only the cryptocurrency itself, but all future litigation of the crypto industry with U.S. regulatory bodies. The question is to determine to what extent cryptocurrencies are a ‘safety’ or security. A fundamental question to see to what extent they may be necessary as other financial instruments.

This is the first time a judge has ruled that XRP is not a ‘security’. Judge Analista Torres of the Southern District of New York has left her decision in writing for the first time on this question, which has so divided the industry.

“As a digital token, XRP is not Howey’s ‘contract, transaction or plan’ that contains the requirements of an investment contract,” Torres says. In other words, Ripple’s token, XRP, is not a security or ‘securities’ that can generate profits through a third party, as stocks can, for example.

Some context. Since 2020, the Ripple cryptocurrency is facing a lawsuit from the United States Securities and Exchange Commission (SEC). The regulator argues that the token itself has been used to generate up to $1.3 billion in profits since 2013. By understanding XRP as a ‘securities’, Ripple would be illegally trading unregistered securities.

The case of Ripple and its XRP token is one of the highest climbers at the forensic level, but it can also be perfectly applied to other cases such as Solana, MATIC, Binance USD or Cardano. Therefore, this decision in favor of Ripple is seen as an overall victory by the crypto industry, although it is not definitive.

When and not when. If it were this easy to tell if XRP is a financial asset, it wouldn’t be such a long and complicated trial. The judge explains that XRP was a security when it was first sold to institutional investors expecting profits, but is no longer a security when sold between anonymous buyers and sellers in the secondary markets. So by barter.

The position of the sentence here is that whether tokens are classified as a financial asset depends on the knowledge and experience of the people accessing them; not just the properties of the token itself.

Securities vs. “Goods”. For these investors, XRP was a financial product that they could use to generate profits in a variety of ways in coordination with others. Instead, it was just a virtual currency for buyers through exchanges.

Following this idea, Bitcoin was never a security. Even the SEC doesn’t question it. It is a ‘commodity’ and this is because it is structured in such a way that due to its composition there are not a few investors who can change the value at will, for example by burning coins or switching between several.

A win for exchanges like Coinbase. According to the judge’s understanding of the legal debate in this way, the stock markets will be able to sleep more peacefully. It’s a setback for the SEC, which has sued exchanges like Coinbase for illegally offering these securities.

According to this Justin MassacreParadigm Legal Director: “Proving that secondary token sales are securities would be very difficult in this logic. The SEC may appeal, but they will likely lose in the Supreme Court even if they win at the appeal level.”

What is the Howey test? If we look at the judge’s argument, reference is made to Howey’s requirements. This is a test that refers to the 1946 Supreme Court case between the SEC v. WJ Howey Co, describing whether something is a financial security if it meets a set of conditions:

• money investment
• in partner company
• In anticipation of making a profit
• derived from the efforts of others.

Let’s see what happens with Ripple and XRP. The judge explains that he has no doubts that anyone has a money payment. Something that can be applied even in barter situations. But the rest of the requirements will be met only by expert traders.

The existence of a “partner company” arises in these situations because “the fate of corporate buyers depends as much on the success of the company as the rest of the other buyers.”

The “reasonable expectation of earnings from others” is also met, as early XRP investors know what they’re getting into.

They point out from the YSK that it is unfair to interpret the law in this way. John Reed Stark, a former SEC official, explains that the court decision is “problematic on multiple fronts.” His main argument is that anonymous investors, who need more protection through exchanges, in this case receive less support.

“In other words, the rich get support and referrals, while the poor don’t. This seems unfair and contradicts the fundamentals of US Securities laws,” Stark explains. Mainly because seeing XRP as a security means more demand.

The debate will continue until the Supreme Court (or Congress) decides. Ripple’s lawsuit with the SEC is not over yet. This is just a small victory. At this time, Justice has for the first time made a clear decision on whether XRP is a ‘security’. Between the allegations and the qualifications, the case will be decided in the Supreme Court. Their stance will ultimately determine when cryptocurrencies will be considered financial assets like stocks or just base currencies like the dollar.

Another option is for Congress to decide to amend the law to settle the controversy. Several congressmen paved the way after learning of Judge Torres’ decision. But while this is the best option for the SEC, it’s far from happening due to the lack of consensus.

In Europe, a third path has been chosen: to create specific legislation for cryptocurrencies, where they are treated neither as ‘securities’ or ‘commodities’, but with their own characteristics and obligations. A regulatory strategy far from American philosophy to address these issues.

Image | intelligence olszewski

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