The U.S. District Court for the Southern District of New York recently ruled that certain sales and distributions of XRP tokens by Ripple and its executives were not investment contracts, potentially providing a new arrow in the quiver for other cryptocurrency firms fighting litigation from the Securities and Exchange Commission (SEC). This is a significant opinion that has the potential to change the landscape of the SEC’s enforcement efforts, or the success of those efforts, said Teresa Goody Guillén, a former attorney with the SEC office of the general counsel. Joe Castelluccio, leader of law firm Mayer Brown’s fintech and digital assets, blockchain, and crypto groups, noted that the portions of the decision that are in Ripple’s favor are fairly fact-specific, and while there may be some that are similarly situated in the market, others in the market may find it challenging to rely on those portions of the decision if their circumstances do not directly align.
The industry latched on to the news that a federal judge had essentially declared token sales on exchanges weren’t investment contracts, and the price of the XRP token surged as high as 96% on Thursday following the news. Christian Schultz, a former official at the SEC division of enforcement, said, There’s no way to look at the Ripple decision as anything but a win for the crypto industry. XRP is not a security and the company’s and executives’ transactions in XRP on the secondary market do not violate the securities laws.
Arthur Jakoby, partner at Herrick, Feinstein LLP, added that the ruling undercuts the SEC’s position that secondary sales of digital assets on exchanges such as Coinbase constitute the sale of unregistered securities.
Although no other district court judges are obligated to follow the reasoning in this ruling, it could spell problems for the SEC in other pending litigation, particularly those that are focused primarily if not exclusively on secondary market activity, according to Schultz.