by Scott Emick
1/15/2025
The legal classification of XRP, the cryptocurrency associated with Ripple Labs, has been a contentious issue between Ripple and the U.S. Securities and Exchange Commission (SEC). In July 2023, U.S. District Judge Analisa Torres ruled that XRP is not inherently a security, distinguishing between different types of sales:
- Programmatic Sales: Sales of XRP on public exchanges to retail investors were deemed not to involve securities. The court noted that these buyers could not have known if their payments went to Ripple or another seller, thus failing to meet the criteria for an investment contract under the Howey Test.
- Institutional Sales: Direct sales to institutional investors were considered securities transactions, as these investors had a reasonable expectation of profit derived from Ripple’s efforts.
The SEC has appealed Judge Torres’s ruling, seeking to overturn the decision that XRP sales to retail investors are not securities. The SEC argues that the court’s distinction conflicts with established securities laws and precedents.
Rationale for XRP Not Being a Security:
- Decentralized Nature: XRP operates on a decentralized blockchain, and ownership does not confer rights to profits or governance in Ripple Labs.
- Lack of Investment Contract: Purchasers of XRP on secondary markets do not enter into a contract with Ripple, nor do they necessarily expect profits derived from Ripple’s efforts.
- Utility Function: XRP serves a functional purpose in facilitating cross-border transactions and liquidity, distinguishing it from traditional securities.
SEC’s Position:
The SEC contends that Ripple’s sales of XRP constitute an unregistered securities offering, emphasizing:
- Fundraising Aspect: The SEC argues that Ripple’s sales of XRP were primarily for fundraising purposes, fitting the profile of a securities offering.
- Expectation of Profit: The SEC believes that investors purchased XRP with the expectation of profits derived from Ripple’s efforts to develop and promote the XRP ecosystem.
The ongoing legal battle has significant implications for the cryptocurrency industry, as it may set a precedent for how digital assets are classified and regulated in the United States. The outcome of the SEC’s appeal could either reinforce or challenge the current understanding of what constitutes a security in the context of digital assets.
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