On July 13, 2023, Judge Torres delivered the verdict on the Ripple vs. SEC case. The case concluded with a potentially partial victory, presenting characteristics that could favor the SEC in future cases.
It should be noted that those interested in the crypto world and tokens should understand the differences between XRP and Ripple. While Ripple created the XRP token (bearing the same name), they are distinct entities with different purposes.
THE CASE
Ripple distributed XRP in three modes: 1- Institutional Sales with growth-oriented advertising and capital reuse for fortification, 2- Programmatic Sales involving direct or semi-direct sales to undisclosed buyers, and 3- Payments to employees via AirDrop/Gift.
The judge's emphasis was on the Howey test, which doesn't require "essential ingredients" as claimed by Ripple. Contrarily, recent cases indicate that the relevant test centers on investors' profit expectations from the efforts of others. Additionally, the Howey test clarifies that an investment contract encompasses contracts, transactions, or schemes, though not inherently securities. The Court analyzes the economic reality and circumstances surrounding the underlying asset's offers and sales.
The judge cited previous application of the Howey test to a wide range of tangible and intangible assets (whiskey casks, orange groves, payphones, condominiums, beavers, digital tokens) including digital tokens like XRP. While XRP may have certain characteristics of a commodity or currency, it could still be considered an investment contract when offered or sold.
Many investors purchased XRP expecting to profit from Ripple's efforts. Ripple's communications, marketing campaigns, and Institutional Sales reinforced this understanding, as investors expected Ripple to utilize the capital received to improve the XRP market and XRP Ledger.
Regarding Programmatic Buyers (less than 1%), while they may have expected profits, these were not necessarily derived from Ripple's efforts. Programmatic Buyers were unaware that they were buying XRP from Ripple and were not fully aware of Ripple's actions and objectives.
The XRP AirDrop to employees does not fall under security as no cash payments were involved.
Larsen and Garlinghouse asserted that the U.S. Department of Justice and the U.S. Treasury Department's Financial Crimes Enforcement Network labeled XRP as a "virtual currency" exempt from U.S. securities laws in 2015. Additionally, they understood the 2018 speech by the then-Director of the SEC Division of Corporate Finance, Bill Hinman, which declared that neither bitcoin nor ether were securities.
They also stated that XRP was not a security based on determinations by various foreign regulators, including those in Japan, Singapore, Switzerland, the United Arab Emirates, and the United Kingdom.
CONCLUSIONS
According to Judge Torres' statements, XRP, as a token, cannot be categorically defined as a security. Similarly, many other materials, assets, and contracts cannot be universally classified as securities.
On the other hand, Ripple's advertisement and token sales can be classified as security sales, necessitating SEC declaration.
As a result, the SEC has achieved its objective, granting the ability to apply Howey to various crypto situations involving profit declarations by most token issuers.
The classification of tokens as commodities, securities, or currencies does not significantly alter the situation.
This brings us to another intriguing case between July 20 and 21: SEC vs. Coinbase.
Preview: The judge overseeing the Coinbase case faces time constraints and requested the SEC and Coinbase to reach an agreement exactly the same day XRP vs. SEC case's conclusion. The SEC accuses Coinbase of selling tokens as securities, using investment propaganda and risk warnings. The focus is not on the tokens themselves but on sellers promoting them as investments, creating an interesting debate. Personally, cryptocurrencies are speculative gambles rather than investments.
Stay tuned for the upcoming CoinBase Vs. SEC article; it promises to be fascinating.
It should be noted that those interested in the crypto world and tokens should understand the differences between XRP and Ripple. While Ripple created the XRP token (bearing the same name), they are distinct entities with different purposes.
THE CASE
Ripple distributed XRP in three modes: 1- Institutional Sales with growth-oriented advertising and capital reuse for fortification, 2- Programmatic Sales involving direct or semi-direct sales to undisclosed buyers, and 3- Payments to employees via AirDrop/Gift.
The judge's emphasis was on the Howey test, which doesn't require "essential ingredients" as claimed by Ripple. Contrarily, recent cases indicate that the relevant test centers on investors' profit expectations from the efforts of others. Additionally, the Howey test clarifies that an investment contract encompasses contracts, transactions, or schemes, though not inherently securities. The Court analyzes the economic reality and circumstances surrounding the underlying asset's offers and sales.
The judge cited previous application of the Howey test to a wide range of tangible and intangible assets (whiskey casks, orange groves, payphones, condominiums, beavers, digital tokens) including digital tokens like XRP. While XRP may have certain characteristics of a commodity or currency, it could still be considered an investment contract when offered or sold.
Many investors purchased XRP expecting to profit from Ripple's efforts. Ripple's communications, marketing campaigns, and Institutional Sales reinforced this understanding, as investors expected Ripple to utilize the capital received to improve the XRP market and XRP Ledger.
Regarding Programmatic Buyers (less than 1%), while they may have expected profits, these were not necessarily derived from Ripple's efforts. Programmatic Buyers were unaware that they were buying XRP from Ripple and were not fully aware of Ripple's actions and objectives.
The XRP AirDrop to employees does not fall under security as no cash payments were involved.
Larsen and Garlinghouse asserted that the U.S. Department of Justice and the U.S. Treasury Department's Financial Crimes Enforcement Network labeled XRP as a "virtual currency" exempt from U.S. securities laws in 2015. Additionally, they understood the 2018 speech by the then-Director of the SEC Division of Corporate Finance, Bill Hinman, which declared that neither bitcoin nor ether were securities.
They also stated that XRP was not a security based on determinations by various foreign regulators, including those in Japan, Singapore, Switzerland, the United Arab Emirates, and the United Kingdom.
CONCLUSIONS
According to Judge Torres' statements, XRP, as a token, cannot be categorically defined as a security. Similarly, many other materials, assets, and contracts cannot be universally classified as securities.
On the other hand, Ripple's advertisement and token sales can be classified as security sales, necessitating SEC declaration.
As a result, the SEC has achieved its objective, granting the ability to apply Howey to various crypto situations involving profit declarations by most token issuers.
The classification of tokens as commodities, securities, or currencies does not significantly alter the situation.
This brings us to another intriguing case between July 20 and 21: SEC vs. Coinbase.
Preview: The judge overseeing the Coinbase case faces time constraints and requested the SEC and Coinbase to reach an agreement exactly the same day XRP vs. SEC case's conclusion. The SEC accuses Coinbase of selling tokens as securities, using investment propaganda and risk warnings. The focus is not on the tokens themselves but on sellers promoting them as investments, creating an interesting debate. Personally, cryptocurrencies are speculative gambles rather than investments.
Stay tuned for the upcoming CoinBase Vs. SEC article; it promises to be fascinating.