Ripple Effects: Will US Court Ruling on XRP Remove a Crypto Barrier?

By  Noah Washington July 26, 2023

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  • After a two-year legal battle, the XRP vs SEC lawsuit has concluded, centering on whether XRP should be classified as a security
  • The court ruled that XRP should be considered a security when sold to institutional investors due to their higher understanding
  • However, XRP is not a security when sold to retail traders who may be unaware of its securities-like qualities
  • The ruling resulted in a surge in XRP's price as it removed regulatory uncertainty and led to exchanges considering relisting XRP - but the ruling has limitations

After a two-year battle, the XRP vs SEC lawsuit has been brought to a close. The court case centered on the question of whether XRP should be classified as a security under the law.

Background of the Case

The Securities and Exchange Commission alleged in December 2020 that the company, Ripple, and its current and former top executives raised $1 billion through unregistered securities and violated the Securities Act of 1933 by selling XRP starting in early 2012 without registering.

The legal saga between Ripple Labs and the SEC has been ongoing for the past three years. The SEC alleges that Ripple conducted an unregistered securities offering when it sold XRP to investors. Ripple maintained that XRP should not be considered a security. The court's ruling has brought some clarity on this controversial topic, although with some restrictions.

Reasoning Behind the Ruling

US District Judge Analisa Torres, presiding over the case, concluded XRP should be classified as a security when sold to institutional investors. This is due to their higher level of understanding of XRP's security-like qualities. However, she deemed XRP not to be a security when sold to retail traders, who may have been unaware of these characteristics.

The ruling was a partial victory for both Ripple and the SEC. The judge ruled that the SEC had not adequately shown that XRP was a security, but also said that Ripple had not met its burden of proving that it was not a security. This leaves room for interpretation and further legal battles in the ongoing debate surrounding the classification of cryptocurrencies.

Despite this, many crypto traders took to Twitter to celebrate the ruling in this landmark case,

Market Reaction

The price of XRP skyrocketed over 70% in just a few hours after the ruling, reaching as high as $0.86 before pulling back. The ruling was seen as a huge victory for Ripple and the future of XRP as it removes major regulatory uncertainty.

Most major exchanges such as Coinbase and delisted XRP trading pairs over the past year due to the uncertainty. With the court declaring XRP not a security, many exchanges may move swiftly to relist XRP.

The surge in price began almost immediately as the news spread across social media and crypto news outlets. According to data from CoinMarketCap, XRP spiked from $0.51 to $0.88 in less than two hours.Trading volume across exchanges topped $8 billion, the highest volume seen in XRP since early 2018.

Limitations of the Ripple Decision

The court's decision was specific to the understanding and knowledge of retail investors during the period in question, which was characterized by a less mature crypto market and evolving regulatory frameworks. This means that the ruling does not provide a definitive resolution to the broader question of whether cryptocurrencies, in general, should be considered securities.

The ruling does not necessarily mean that the SEC will provide clear definitions or guidelines on what constitutes a security in crypto for the general public. This leaves a degree of uncertainty and potential regulatory challenges for crypto projects and traders in the near future.

Implications for the Crypto Market

The court ruling carries significant implications for various holders within the crypto market. Crypto exchanges, such as Coinbase, may find some relief as the ruling suggests that they may not be held responsible for the general public's purchase of potential securities on their platforms. This could alleviate concerns about retroactive enforcement actions against exchanges.

With XRP being considered a security when sold to institutional investors, projects may face increased scrutiny and potential regulatory constraints during their initial raise.

The court's ruling challenges the current industry practice of pre-funding crypto projects before their public launch, as these tokens could potentially fall under the jurisdiction of SEC regulations. This could call for a reassessment of fundraising strategies and legal compliance frameworks within the crypto ecosystem.

The Ripple case is just one of many legal battles between the SEC and various actors within the crypto industry. The SEC's expanding involvement in the crypto market has led to numerous lawsuits and charges against prominent companies such as Celsius, Binance and FTX, among others. This broader landscape of legal challenges further contributes to the uncertainties surrounding regulatory compliance and the future of the crypto sector.

By designating XRP as a "non-security" they may have removed a significant barrier for businesses considering using Ripple's On-Demand Liquidity service, which leverages XRP for cross-border payments. This is because securities are subject to more stringent regulations than other types of financial products, which could have made it difficult for businesses to use XRP in their operations. With the court's decision, businesses will now be able to use XRP more freely, which could lead to increased adoption of the cryptocurrency.

Some banks and financial firms distanced themselves from XRP while the lawsuit was ongoing. It is yet to be seen how soon they will resume their activities now that the court has made its decision. However, the court's decision is likely to be seen as a positive development for XRP, and it could lead to increased interest from businesses in using the cryptocurrency.

The recent legal victory for Ripple is a major win for the company, but it does not mean that all of their legal troubles are over. A class action lawsuit filed on behalf of XRP investors is still pending, and the plaintiffs allege that Ripple misled them into believing that XRP was not a security. Ripple denies any wrongdoing, but if found liable, they could face significant monetary damages. The outcome of this lawsuit could have a major impact on the future of Ripple and XRP.