XRP court ruling shocks the industry: Is it really a security? What will the future hold?

Author: Wu Says Blockchain

Wu Says has learned that the Southern District Court of New York ruled on the SEC's lawsuit against Ripple, concluding that Ripple's programmatic sales of XRP do not constitute an offer and sale of an investment contract; however, Ripple's institutional sales of XRP constitute an unregistered offer and sale of an investment contract in violation of Section 5 of the Securities Act.

According to analysis by Adam Cochran, the judge did determine that institutional sales/fundraising are securities, but the programmatic sales on exchanges did not meet the third prong of the Howey test, so selling to users through exchanges is permissible, as long as it is done via an order book rather than through methods like ICO/IEO/Launchpad; bounties, using XRP for investments in others, grants of XRP, and transfers to executives are not considered securities.

Most importantly, the court emphasized that the token itself does not constitute an "investment contract," and therefore is not a security; rather, the sale or other trading is what matters, and analysts generally view this as a significant victory.

@ricenbeats0x pointed out that if the ruling states that XRP being listed on exchanges does not make it a security, then the SEC's lawsuit against Coinbase is "finished."

ConsenSys lawyer Bill Hughes briefly explained the court ruling on XRP: Trading XRP on exchanges (and funding its operations through these sales) is not an investment contract, and therefore not a security; paying salaries with XRP is not an investment contract, and therefore not a security; direct sales of XRP by Ripple under contract constitute an investment contract, and thus a security; Ripple is clearly aware that doing so without registration is illegal; ultimately, a jury will need to decide whether Ripple executives aided and abetted this unregistered offering; the SEC is expected to appeal to the Second Circuit Court immediately.

The SEC responded by stating: We are pleased that the court found Ripple's provision of investment contracts and sale of XRP tokens violated securities laws in certain instances. The court agreed with the SEC's view that the Howey test governs the securities analysis of crypto transactions and rejected Ripple's fictional test regarding what constitutes an investment contract, instead emphasizing that various tangible and intangible assets can serve as subjects of investment contracts in Howey and subsequent cases. Additionally, the court dismissed Ripple's fair notice argument (another standard for determining securities), stating that the Howey test is clear, and claiming ignorance cannot serve as a defense against violations of securities laws. We will continue to review this decision.

U.S. exchanges like Coinbase subsequently announced the relisting of XRP, with XRP surging by an astonishing 72% in 24 hours, its market cap jumping to fourth place, and the total liquidation amount across the network reaching $237 million, with XRP accounting for $52.34 million. XLM rose by 57%, ADA by 22%, and SOL by 16%. Coingecko data shows that South Korea's largest exchange, Upbit, ranked first in XRP trading volume, reaching $2.1 billion in 24 hours, followed by Binance at $1.7 billion and OKX at $500 million; indicating that "familiar" South Korean investors remain a significant driving force behind this surge. Notably, XLM and ADA, which ranked second and third in 24-hour gains, also had their trading volumes led by Upbit. These two tokens are among those that Japanese and South Korean investors were early familiar with and actively participated in.

LD Capital researcher @JinzeJiang0x0 analyzed that whether XRP itself is considered a security has not been directly confirmed, and this document does not cover all of the SEC's allegations. The court reviewed different sales and distribution scenarios surrounding XRP, determining whether these specific situations constitute sales of securities or investment contracts, and cannot conclude the commonly held belief that "airdrop tokens are not securities." "Programmatic sales" refer to sales made by Ripple to "programmatic buyers" on digital asset exchanges, not to all retail investors in the secondary market; interpreting this as "secondary sales of altcoins do not violate securities laws" is incorrect. The ruling from the Southern District Court of New York specifically noted that the court did not discuss whether XRP's secondary market sales constitute investment contract sales, as the SEC did not submit this as a direct issue to the court. The SEC's allegations against the founders for up to $600 million in personal unregistered sales were also not discussed in detail in this court document.

U.S. House Majority Whip Tom Emmer stated, the Ripple case is a milestone development that proves tokens and investment contracts are independent and distinct, and we should legislate accordingly; my bipartisan bill, the Securities Clarity Act, captures this concept vividly to provide the regulatory confidence needed to ensure that the design of the next generation of the internet aligns with American values.

However, several U.S. lawyers interviewed stated that the logical (ruling) conclusion is that XRP's secondary sales are not securities transactions; this will be seen in the Coinbase and Binance cases; but this ruling is not binding, and even judges in the same district court may disagree; the judge's ruling can still be appealed to the Second Circuit Court of Appeals, and many experts predict this will happen, as appellate courts often overturn the rulings of trial court judges.