Is Ripple (XRP) a security? It’s been one of the most hotly contested questions in the cryptocurrency sector (or, at least, the non-bitcoin altcoin space) for the past three years.
US securities regulator the Securities and Exchange Commission (SEC) has been seeking validation of its claim that XRP is, without doubt, a security and thus subject to the stringent securities laws that any other equity offering or investment contracts are subject to.
Ripple Labs, the developer of the XRP token, has been fighting this through the courts for the past three years.
On Thursday, District Judge Analisa Torres finally gave a clear-cut answer: Ripple (XRP) is a security sometimes, but sometimes it isn’t. It really depends on who’s buying.
In the more formal parlance: “For the foregoing reasons, the SEC’s motion for summary judgment is GRANTED as to the Institutional Sales, and otherwise DENIED.”
OK, so maybe the answer is not so clear-cut after all.
The basic premise of the ruling is this: XRP was a security when being sold to institutional investors, but not necessarily a security when the average Joe bought some on the public exchanges.
“Reasonable investors…in the position of Institutional Buyers, would have purchased XRP with the expectation that they would derive profits from Ripple’s efforts,” read the court document.
But surely buyers on the public exchanges were expecting to make a profit too?
Yes, but they “did not derive that expectation from Ripple’s efforts (as opposed to other factors, such as general cryptocurrency market trends)”.
This is the key difference that makes XRP tokens not a security when being resold on Binance, Coinbase (NASDAQ:COIN) or any other crypto exchange.
What do oranges and Ripple (XRP) have in common?
It goes back to the Howey Test, the framework on which US securities law is determined.
Under Howey, any contract between a promoter (Ripple Labs) and an investor (a buyer of XRP tokens) to which the investor expects to make a return based on the efforts of the promoter constitutes a security contract.
The court determined that the average Joe buying XRP on Binance didn’t expect to derive profits from the efforts of Ripple Labs.
Rather, they expected the volatile world of the crypto markets to pump XRP to the moon. Thus it wasn’t a security in this instance.
The Howey Test was first determined in the 1946 Securities and Exchange Commission v. W. J. Howey Co. case.
W.J. Howey was a Florida-based citrus farm that offered investors the opportunity to purchase units of land, which they would then lease back to Howey, on which Howey would cultivate and sell oranges.
Essentially, these investors were giving Howey Co the venture capital to expand its orange-growing capabilities for a tidy return in the end.
The SEC determined that this leaseback deal was a security contract thus the orange groves were securities.
Replace orange groves with strings of code that comprise a crypto token, and the SEC is still applying the same rules today.
But, as Judge Torres considered: “If the original citrus groves in Howey were later resold, those resales may or may not constitute investment contracts, depending on the totality of circumstances surrounding the later transaction.”
So yes, those orange groves were securities, but if the average Joe were to have bought one down the line, without expecting W.J. Howey to deliver a profitable return, then maybe they wouldn’t have been.
Just as XRP being sold on Binance may not be.
The net result is that everyone is claiming victory.
The SEC successfully persuaded the courts to acknowledge XRP as a security at the institutional level. They won.
Ripple Labs successfully persuaded the courts to acknowledge that XRP was not a security at the retail level. They also won. For now.
The case is still ongoing and is expected to go to trial.
In the short term, XPR HODLers are the real winners. The cryptocurrency just gained 65% overnight, bringing it to US$0.78 apiece for the first time since early 2022.