The Securities and Exchange (SEC) sued Ripple labs for violating the securities laws when it provided programmatic and institutional sales of the cryptocurrency XRP. The SEC argues that XRP constitutes an unregistered security, as it was allegedly sold primarily through institutional channels. Ripple Labs, however, contends that XRP is a digital asset used for facilitating transactions and should not be classified as a security. The parties cross-moved for summary judgment on whether the sales constituted securities contracts. On July 13, 2023, Federal District Judge Analisa Torres decided the motions in favor of.... both of them?
Broadly, Judge Torres ruled that Ripple programmatic sales (be patient... I will get to that) were not regulated by the securities laws but that the institutional sales were regulated.
In the context of cryptocurrencies, programmatic sales refer to the distribution of tokens through the use of trading algorithms. Ripple’s programmatic XRP sales on these digital asset exchanges were blind bid/ask transactions. Therefore, Ripple did not know who was buying the XRP, and the purchasers did not know who was selling it.
Institutional sales occurred when Ripple sold XRP directly to institutional buyers, hedge funds and ODL customers pursuant to written contracts.
Judge Torres determined that the distinction between programmatic and institutional sales determined whether securities fall under the regulatory purview of the SEC. If XRP is deemed a security, Ripple Labs could face penalties for conducting an unregistered securities offering. Additionally, this classification would subject XRP to stringent disclosure requirements and potentially restrict its tradability on cryptocurrency exchanges. If XRP were not a security, it could be treated as a currency or commodities and different regulatory frameworks would apply.
Here Judge Torres concluded that XRP could be both, depending on the context. Interestingly, the court put great weight upon how well Ripple knew its XRP customers. Well-known institutional customers were sold securities and nearly anonymous transaction were merely commodities. Both customers received the identical product. Both the SEC and Ripple claimed victory in this case. Time will tell. Among other things, I await the inevitable cross appeals.