Does the court ruling for Ripple Labs against SEC change anything?
Earlier this month, XRP – also known as Ripple – shot up in value on the back of a ruling from the US Securities and Exchange Commission (SEC).
After falling from a pandemic high of $1.65 to around 30 cents, the token has just about doubled and rocketed more than 70% on July 12.
You might wonder what was behind this and whether the news about the SEC ruling has provided some much-needed clarity in a positive direction. But, the answer to the latter point has to be a straightforward ‘no’. In the simplest terms, the ruling seems to imply that XRP is a security in one scenario but not in another. If that’s, true what are the implications for other cryptos?
First, we need to go back a bit and set some context. With its initial actions, the SEC sought to hobble Ripple Labs – creator of XRP token – and accused it of offering XRP as an unregistered security. This goes to the heart of the matter and the SEC used the Howey test – a test that determines whether a transaction qualifies as an investment contract – to show Ripple Labs had transgressed its rules.
The SEC then accused the company, and its current and former chief executives, of conducting a $1.3 billion unregistered securities offering by selling XRP. One part of the recent ruling seems to agree with this.
On July 13, in a court ruling that has been hailed as weakening the SEC’s stance on crypto, a federal judge ruled two ways in the same judgement. As far as Ripple selling XRP to institutions, that very definitely constituted a security sale – and if you think about it for a moment it obviously is.
On the other hand, the judge also ruled that Ripple – XRP – sold through exchanges, wasn’t a security. The rationale is that if you buy on an exchange, you don’t know who you are buying from and you are not relying on anything that they say because you have no communication with them.
This is actually very weird. That implies that as long as the creators of a token never sell them to institutions, they are not securities. I’m not entirely sure how they would get to an exchange without coming from the creators, but, again, the implication is that these exchange-listed tokens are as free as birds from SEC oversight.
That cannot be right, in my opinion. The comparison with Bitcoin is stark. Bitcoin is classified as a commodity by the SEC and, hence, free from its oversight. That’s not to say that exchanges dealing in Bitcoin are not subject to SEC laws – just that the Bitcoin itself is.
Why? Because no entity is offering Bitcoin with any promise or suggesting that the entity is working to make what you buy worth more. Bitcoin doesn’t care. It is what it is and nothing more.
Perhaps most interesting is the aforementioned reaction of the markets to the ruling. XRP of course shot up, but then people read rather more into the ruling. Although it has dropped back a bit, at the recent peak this week XRP still stands at only about 20% of its all-time high.
So what happens now? There are other tokens that have had the same charges levied against them by the SEC, and they would have to be feeling more confident. Don’t forget, the SEC is the regulator. It can change the rules and can appeal the part of the judgement it doesn’t like.
One thing is for sure, there cannot be the situation where the same token is defined as a security in one place and not in another. Lots of other tokens are going to be considered securities and subject to US regulation, which might mean they are traded in, for example, Estonia, but not in America.
As ever, while the crypto landscape appears settled when you look at market movements, on look beyond the surface and you quickly realise there is a lot more uncertainty – big changes may still be ahead.
Temple Melville is CEO of The Scotcoin Project Community Interest Company (CIC)