Ripple's XRP Ruling Does Nothing for Regulatory Clarity

The reaction to last week’s court ruling on the sale of Ripple’s XRP token makes no sense. After a two-year legal battle instigated by the U.S. Securities and Exchange Commission, a judge ruled that XRP is an unregistered security when sold to institutional buyers but isn’t when it’s bought by anyone else.

In 2020 the U.S. Securities and Exchange Commission (SEC) filed a lawsuit against Ripple, its CEO Brad Garlinghouse and co-founder Chris Larsen, alleging failure to register its token XRP as a security before selling around $1.3 billion worth. What followed was years of Twitter spats and incremental legal advancements as Ripple attempted to argue how fundamentally incorrect it is to call XRP a security.

Never mind that there is a company in Ripple behind XRP, which means that one could reasonably conclude that XRP purchasers would expect to profit from the managerial or entrepreneurial efforts of the token issuers (i.e. the basic definition of a security in question). No. XRP is called a cryptocurrency and its supporters argue it cannot possibly be a security.

With last week’s news, XRP unsurprisingly rallied. Its token price nearly doubled and trading volumes exploded by an eye-watering 1,351%.

But Thursday’s news has done basically nothing to make clear where crypto will stand in the eyes of U.S. law. We know where the SEC stands – everything is a security except Bitcoin and maybe Ethereum – but the SEC isn’t the end all be all. Now we’re in this weird world where we have a crypto asset that is an unregistered security sometimes. Sure, there’s a difference between retail and institutional buyers here since retail did not (and is not) buying XRP directly from Ripple so there cannot be an investment contract between retail investors and Ripple.

Still, I submit that this makes no sense. It’s like saying someone who buys a house as an investment is buying real estate, but a person who buys a house to live in is not buying real estate. It’s nonsense. Either XRP is a security, or it is not. These should be mutually exclusive.

So, no, JMP Securities, this is not a milestone win for the crypto industry. I know you published a research note that stated this ruling “provides legal clarity and defense around what does and does not constitute a security, and that overall outcome is in favor of what many in the industry had been arguing” but that’s not what was provided here at all.

Instead, the court decided that the answer to “is this a security?” was – like many things in finance – ”it depends.”