A token little known outside crypto circles has delivered a huge win for the industry, potentially stopping in its tracks the government crackdown on digital assets.
Late Thursday and early Friday, crypto executives celebrated a partial victory by Ripple Labs over the Securities and Exchange Commission in a federal district court. The SEC had sued Ripple alleging, among other things, that a token the company supported called XRP is a security. While the judge sided with the SEC for certain transactions, she determined that the token, by itself, didn’t meet that definition.
While Ripple still must fight parts of the case at trial, the implications for the industry—and for the SEC’s crackdown—are more important. Digital assets exchanges, including
Coinbase Global
(ticker: COIN) and Binance, will use the decision to try to thwart recent lawsuits the SEC has brought against them. Issuers of tokens similar to XRP—broadly known as “alt coins”—will cite the case in their own defenses, and trading platforms that had avoided listing those tokens for fear of being sued will now reconsider, likely bolstering alt coin prices.
The
XRP
token itself jumped almost 70% over the past 24 hours, with many other non-Bitcoin cryptos following suit:
Ether
prices advanced 6%,
Dogecoin
was up 7%, and beaten-down names such as
Solana
and
Cardano
rallied 26% and 21%, respectively.
“There’s not a way to look at this decision as anything but a win for the industry and somewhat of a blow to the SEC’s crypto enforcement agenda,” said Arnold & Porter attorney Christian Schultz, who does work for crypto clients and is a former counsel in the SEC’s enforcement division.
Ripple Labs was founded more than a decade ago with the promise of using open-source payment software and XRP to enable low-cost transactions. The firm and its executives raised money in part by selling billions of XRP tokens to investors.
In 2020, the SEC sued the company and two executives in federal court in the Southern District of New York, accusing them of conducting a $1.3 billion unregistered securities offering. Some exchanges, including Coinbase, almost immediately suspended trading of the token on their platforms.
The key uncertainty, for Coinbase, Ripple, and other firms was that if judges determined XRP fell under securities laws, the companies would need to register with the agency or face hefty fines.
Coinbase and others for years have said they don’t believe there is a clear path under current rules to register with the SEC. If tokens akin to XRP were securities, they might have had to scrap a growing portion of their business.
Judge Analisa Torres went a long way to allaying those concerns in the Ripple case. She said XRP, in and of itself, isn’t a security, and that a token’s status depends on how it is sold.
Early sales to institutional investors—who knew they were buying from Ripple—did qualify as securities, the judge said, while sales on exchanges to other investors—who couldn’t have known Ripple received the money—did not.
The SEC declined to comment on Friday. On Thursday, an agency spokesperson said the SEC was pleased with some aspects of the judge’s decision and would continue to review it.
Ripple executives claimed victory on Twitter.
The ruling was a relief to investors in Coinbase, whose customers seem to be in similar circumstances to the Ripple investors that the judge said didn’t fall under securities law.
Coinbase stock was down 1.6% to $105.31 as Friday after rising more than 20% on Thursday after the ruling.
“We believe a large overhang on the stock is regulatory uncertainty. With this summary judgement, we believe some of this is de-risked,” wrote Needham & Co. analyst John Todaro in a research note on Friday, who has a “Buy” rating on Coinbase and raised his price target to $120 from $70.
Some crypto supporters also believe the judge’s decision could jump-start efforts in Congress to pass legislation to regulate digital assets.
Republican lawmakers in the House plan to move forward this month on bills that would create rules for exchanges and tokens. They had run into skepticism from some Democrats and SEC Chair Gary Gensler, who had argued that the industry could be policed under current rules.
“That argument just doesn’t work anymore,” said Kristin Smith, CEO of the Blockchain Association, an industry trade group. “Democrats are going to realize that if they want consumer protections in this space, they’re going to have to act.”
The judge’s decision in the Ripple case isn’t the final say. The SEC could seek to appeal, a process that might take years. What is more, it is unlikely that Gensler, who has aggressively pursued crypto firms, will let up merely because of one judge’s decision, said BTIG Director of Policy Research Isaac Boltansky.
“It is a clear win for the crypto industry, but this decision should not be viewed as a panacea,” said Boltansky, adding that it is a tall order for Congress to pass crypto-related legislation anytime soon.
But until then—or until another judge contradicts the ruling—the crypto market is getting a long-awaited shot in the arm.
Write to Joe Light at [email protected] and Jack Denton at [email protected]
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