Ripple's open market sales of XRP cryptocurrency aren't securities, court rules in landmark decision

The existential question for the U.S. crypto sector has been whether the thousands of tokens, from Bitcoin and Ether to Dogecoin and Pepecoin, are securities—a financial term for an investment contract, which would require registration with the SEC. Crypto firms have argued that working with the agency is impossible under the current rules, while the SEC has accused nearly every token, with the clear exception of Bitcoin, as operating illegally.

Ripple became an important trial balloon for the debate. In 2020, the SEC charged the company—founded in 2012 with the promise of disrupting the global payments network through its proprietary token, XRP—and two of its executives with raising over $1.3 billion through an unregistered digital asset securities offering. Unlike other subjects of SEC lawsuits, Ripple challenged the case, which has been litigated for the past three years in the Southern District of New York.

The proceedings have enraptured the crypto industry, especially as the SEC has aggressively pursued other exchanges and projects for allegedly offering unregistered securities. A decision that found XRP was not a security could buoy other firms and weaken the SEC’s torrent of lawsuits against the industry, while a total victory for the SEC would have proved disastrous and likely climbed its way to the Supreme Court.

Even as the case progressed—including a dramatic release of emails from a previous SEC director that Ripple’s lawyers said supported its “fair notice defense,” which argues the agency has not provided sufficient information on its legal interpretations—some crypto participants worried that it could set back the industry. Unlike other projects, Ripple is unabashedly centralized (many other projects have argued their tokens are not securities because they are decentralized) and also sports a loyal, and often toxic, army of supporters called the XRP Army that openly bashes critics.

The result, released on Thursday, is a mixed bag. The 34-page decision by Judge Analisa Torres found that institutional sales of XRP by Ripple did constitute unregistered securities. The institutional sales—written contracts arranged with buyers such as hedge funds—constituted around $728 million. More consequentially, Torres found that programmatic sales—sales from Ripple that occur on the open market, like exchanges—were not an investment contract and not a security.

“Therefore,” the judge wrote, “the vast majority of individuals who purchased XRP from digital asset exchanges did not invest their money in Ripple at all.”

Torres did not agree with Ripple fair notice defense—an argument employed by other firms in their SEC lawsuits, including Coinbase—writing that the Howey test for determining what constitutes an investment contract is a clear guideline.

The question of whether Ripple’s two executives—Brad Garlinghouse and Chris Larsen—aided and abetted the sale of XRP will go to trial, with Torres rejecting the SEC’s motion for summary judgment.

Crypto industry onlookers immediately hailed the decision as a victory for the sector, as many of the SEC’s recent lawsuits have been against tokens sold on exchanges. With secondary sales on exchanges a step removed from programmatic sales—where the company engages trading algorithms to sell its tokens—the result will have widespread implications for the sector, although the judge did not address secondary market sales.

XRP surged after the decision, rising some 30% at the time of publication. The SEC will likely appeal the decision.