The XRP-SEC Ruling & What it Means for US Crypto Regulation

Ripple Labs case could be a major inflection point of U.S. crypto regulation & the start of a commodity-driven digital asset class.

7 min readJul 16, 2023

“Gary Losing to Crypto” by Midjourney AI (@.blaccrypto)

The historical position of the U.S. SEC on cryptocurrency and blockchain regulation has been one of increasing scrutiny and enforcement. While the SEC has not been outright opposed to the technology, it has taken a cautious approach and has raised concerns about investor protection and market integrity. The SEC has argued that many cryptocurrencies should be classified as securities and subject to the same regulations as traditional securities.

In this briefing, we provide an overview of the SEc’s history of regulation the crypto industry by enforcement, the details of the Ripple Labs legal case, and the precedent the case sets for the future of crypto policy in the United States and abroad.

A History of Regulation by Enforcement

In the past, the SEC has taken enforcement actions against companies that have violated securities laws in the context of cryptocurrencies. For example, in 2018, the SEC charged two companies, Airfox and Paragon, for conducting unregistered initial coin offerings (ICOs). The SEC has also issued public notices warning investors about the risks associated with cryptocurrencies and ICOs. In addition, the SEC has pursued legal action against exchanges that have operated without proper registration or violated securities laws.

What even are Digital Asset Securities?

The concept of “digital asset securities” refers to cryptocurrencies or tokens that are considered to be securities under U.S. law. The SEC has argued that many cryptocurrencies meet the definition of a security under the Howey Test, which determines whether a transaction is an investment contract and therefore a security. The Howey Test looks at whether there is an investment of money in a common enterprise with the expectation of profits solely from the efforts of others.

The XRP-SEC Case

In the Ripple Labs case, the SEC argued that Ripple’s XRP token was a security and that Ripple had conducted an unregistered securities offering by selling XRP to investors. The SEC claimed that Ripple had raised over $1.3 billion through the sale of XRP and that the company and its executives had engaged in illegal securities offerings. Ripple, on the other hand, argued that XRP is not a security but a digital asset that functions as a medium of exchange and a store of value.

The key events in the Ripple Labs case include the SEC filing a lawsuit against Ripple Labs in December 2020, alleging that the company had conducted an unregistered securities offering. Ripple Labs filed a motion to dismiss the case, arguing that XRP is not a security. The court denied Ripple’s motion to dismiss in February 2021, allowing the case to proceed. In August 2021, the court granted the SEC’s motion to obtain Ripple’s internal documents related to XRP.

The result of the case so far is that the court has ruled that Ripple’s XRP token was a security when sold to institutional investors but not a security when sold to the general public (i.e., via cryptocurrency exchange and/or decentralized exchanges). The judge’s reasoning was that institutional investors were more likely to be aware of XRP’s securities-like traits, while retail investors were not. This ruling has significant implications for the broader crypto market, as it raises questions about what should and shouldn’t be considered a security. However, it is important to note that the ruling is specific to the time period in question and may not apply to the current crypto landscape. The SEC may need to clarify what counts as a security for the general public going forward.

The result of the case so far is that the court has ruled that Ripple’s XRP token was a security when sold to institutional investors but not a security when sold to the general public (i.e., via cryptocurrency exchange and/or decentralized exchanges).

Why does the SEC think XRP is a Security?

The specific legal arguments made by the SEC and Ripple Labs in the case revolve around whether XRP should be classified as a security. The SEC argued that XRP is a security because it meets the definition of an investment contract under the Howey Test. The SEC claimed that Ripple had conducted an unregistered securities offering by selling XRP to investors. Ripple, on the other hand, argued that XRP is not a security but a digital asset that functions as a medium of exchange and a store of value. Ripple claimed that XRP is more like Bitcoin and Ether, which the SEC has stated are not securities.

Ripple claimed that XRP is more like Bitcoin and Ether, which the SEC has stated are not securities.

These arguments reveal the existing legal understanding of cryptocurrencies and challenge the SEC’s position on the classification of digital assets. The case raises questions about whether and under what circumstances a digital asset meets the definition of a security under U.S. law. It also highlights the need for clearer regulatory guidance on the classification of cryptocurrencies and the application of securities laws to the industry.

Why is this So Important?

The Ripple Labs case sets a precedent for the application of securities law to cryptocurrency companies. The court’s ruling that XRP was a security when sold to institutional investors but not to the general public provides some clarity on how securities laws may apply to digital assets. In particular, the venture capital usage of ‘token warrants,’ which effectively promise a certain amount of protocol/network tokens to an institutional investor in the company, will likely need to evolve to avoid that token being considered a security. On the other hand, the decision was a huge win for so-called ‘utility tokens’ or ‘governance tokens’ as it does leave some speculative wiggle-room for most protocol and network tokens to reasonably be considered non-securities — rather than materializing the extremist-security worldview that the U.S. SEC has been championing

It is important to note that this ruling is specific to the facts of the case and may not apply to other cryptocurrencies or token sales. Each case will need to be evaluated on its own merits, taking into account the specific characteristics of the cryptocurrency or token in question.

How has the Market Responded?

The Ripple Labs case has had a significant impact on the market behavior of XRP and other cryptocurrencies. Following the court’s ruling, the price of XRP surged over 25%. The ruling gave hope to crypto investors that other altcoins may also not be considered securities, leading to gains in other cryptocurrencies as well. The ruling has also prompted exchanges like Coinbase and Gemini to reconsider their listing policies for XRP. Coinbase announced that it would allow trading of XRP again, while Gemini stated that it is exploring the listing of XRP for both spot and derivatives trading.

What’s the Implications for Crypto More Generally?

The Ripple Labs case may have implications for the legal status of other cryptocurrencies in the future. The court’s ruling that XRP was a security when sold to institutional investors but not to the general public raises questions about how other cryptocurrencies will be classified. It is possible that other cryptocurrencies may also be subject to securities laws depending on their characteristics and how they are sold or distributed. The case highlights the need for clearer regulatory guidance on the classification of cryptocurrencies and the application of securities laws to the industry.

The Ripple Labs case ruling has potential implications for the future of American cryptocurrency and blockchain regulation. The ruling raises questions about what should and shouldn’t be considered a security in the crypto industry. It also highlights the need for clearer regulatory guidance on the classification of cryptocurrencies and the application of securities laws. The case could influence the SEC’s approach to regulating the industry and may lead to changes in how cryptocurrencies are regulated in the U.S.

The ruling could also have implications for international regulations, especially in countries outside the U.S. The Ripple Labs case has garnered international attention and has been closely watched by regulators and industry participants around the world. The ruling could influence how other countries approach the regulation of cryptocurrencies and may lead to increased regulatory scrutiny in other jurisdictions. It is possible that other countries may adopt a similar approach to the SEC and classify certain cryptocurrencies as securities, leading to more consistent global regulations for the industry.

Final Thoughts…

In conclusion, the Ripple Labs case has significant implications for the future of American cryptocurrency and blockchain regulation. The court’s ruling that XRP was a security when sold to institutional investors but not to the general public raises questions about how other cryptocurrencies will be classified and regulated. The case highlights the need for clearer regulatory guidance on the classification of cryptocurrencies and the application of securities laws. The ruling could influence the SEC’s approach to regulating the industry and may have implications for international regulations as well. Overall, the case is a significant development in the ongoing debate over how cryptocurrencies should be regulated in the U.S. and around the world.

About the Author

Robby Greenfield has over a decade of experience in blockchain and financial engineering. He has served as an industry leader in deploying decentralized applications in emerging markets, such as Sub-Saharan Africa, the Asia Pacific, and LATAM. Robby has worked with renowned blockchain firm ConsenSys, co-deploying innovative solutions and collaborating with organizations like the U.S. State Department, the World Bank, the UNOPS, Oxfam International, and Care International. Currently, he is the CEO of Umoja Labs, a Coinbase and Mercy Corps-backed Web3 fintech providing payments and credit infrastructure across Sub-Saharan Africa.