After approximately three years, the Ripple-SEC case has finally reached a summary judgment. The court has released its findings based on the evidence presented by both parties. However, this does not signify the end of the case. The court's statement includes several observations that bring joy to everyone involved in the cryptocurrency realm. Among these, the most significant finding is that XRP itself cannot be classified as a security. Instead, the court focused on the sale of XRP, examining it in separate sections. Before delving into the details of the case, let us explore why this decision has generated so much excitement and happiness, and the potential paradigm shifts it may bring about.
When the case was first filed, it marked a significant milestone as the SEC's first major lawsuit against a cryptocurrency company. While numerous cases have emerged since then, none have reached the same magnitude as the Ripple case (except for examples like Coinbase and Binance). The SEC based its primary allegation on the manner in which the token was marketed, arguing that it qualified as an investment contract and thus should be classified as a security. From this perspective, almost all altcoins, including ETH, could fall under the same categorization. Hence, the significance of the case was immense.
In the revealed outcome, the court found that SEC was justified in its claims regarding the marketing and contractual mechanism targeted at institutional investors in the sale of XRP. Consequently, the case no longer has the potential to impact the entire sector. Any penalties related to this matter will now be a subject of Ripple and SEC's negotiations. In other words, the case has become localized. Therefore, it is premature to conclude that Ripple has definitively won the case, but the sector as a whole has achieved a victory.
Why Institutions? Why Not Others?
The court's approach to the issue primarily focused on token sales, which has implications for the ongoing legal proceedings. It is stated that although XRP's operational and functional mechanisms could allow the token to be defined as a commodity, the sale of the token could still be classified as a security. Therefore, attention should be paid to the intent and framework surrounding the sale. It has already been established that XRP is not considered a security as a token.
Due to the SEC's criticism of token sales, these sales are classified into three separate categories: sales to institutional investors, sales made through exchanges, and sales to employees/third parties. Additionally, there is a categorization related to executives, which we will address later.
1. Sales to Institutional Investors
According to the Howey test, the court initially examines whether investors have an investment intent. Ripple acknowledges that it received money in exchange for XRP tokens, but it interprets this as an exchange of goods. However, the court does not accept this interpretation and rules that the money given in exchange for XRP was intended as an investment.
Secondly, the court examines whether investors are making a collective investment in a common enterprise. Ripple consolidated all the money it received from investors into a single pool and managed it together with the company's funds. Consequently, investors became dependent on each other and the company's management. The court ruled that these factors establish a common enterprise.
Lastly, the money invested must have an expectation of profit based on the efforts of others. Ripple argues that both the token sale and the subsequent years rely on the adoption of XRP for Ripple's services, linking the fate of XRP with that of Ripple. This confirms that XRP is dependent on Ripple's efforts. As investors primarily purchased XRP for trading and investment purposes rather than for a product or service, the court found that the profit expectation requirement was fulfilled. Consequently, the court ruled that the sales to institutional investors satisfy all of Howey's tests and that the SEC's claims were justified. If Ripple receives any penalties, they will be related to this aspect.
2. Sales through Exchanges
These sales are referred to as blind sales. In these transactions, neither the buyer knows from whom they are purchasing nor the seller knows to whom they are selling. As a result, it is not possible to definitively judge whether the buyer and seller are investing in Ripple. The buyer might acquire XRP from another user, and the payment may go to that user instead of Ripple. In this scenario, the buyer is not considered to have invested in the company. However, some investors may still purchase XRP with the expectation of its price increasing due to Ripple's efforts. The court found that Ripple did not make any promises or sign contracts with these users, and therefore, Ripple was justified in this regard.
3. Sales to Employees or Third Parties
Ripple has occasionally made payments to its employees or companies it obtains services from in XRP. The court automatically rules in favor of Ripple in this regard. Since no purchase is involved, but rather a payment, the parties cannot be considered to have acquired XRP for investment purposes. The first requirement of Howey's test is not met in this case, and thus, Ripple is deemed justified.
Safe Spaces Have Emerged
The most significant gain from all these aspects is that a specific token cannot be automatically classified as a security. The court acknowledged the complexity of the token aspect, which highlights the need for comprehensive and specific regulations. As court decisions can serve as precedents for future cases, a portion of the SEC's authority has been curtailed. Consequently, the SEC is compelled to expedite the development of a specialized regulatory framework for cryptocurrencies, albeit reluctantly.
Another important point is that despite the SEC's failure to provide clear guidance, the court has filled this void. Companies planning to launch cryptocurrencies now know that they can escape SEC scrutiny if they distribute tokens through blind sales on exchanges. The court has created safe spaces for the industry. It is crucial to establish boundaries regarding where the SEC can and cannot intervene. With no clear regulations in place, the SEC has been attempting to apply its existing rules to cryptocurrencies by interpreting them as flexibly as possible. However, this practice is gradually reaching its end.
Intent Matters
While categorizing token sales, it is mentioned that sales were also conducted from the wallets belonging to Ripple executives, Larsen and Garlinghouse. This can be considered as the fourth category. However, since these sales were also blind sales, the SEC's allegations are rejected for the same reasons.
Furthermore, the SEC accuses the executives of willfully disregarding the regulations. In this regard, the precautions and arguments taken by the executives are of significant importance. Prior to the token sale, the company's executives sought legal counsel to determine whether the process fell within the scope of securities. The company commenced XRP sales only after receiving a positive assessment. The court ruled that due to factors such as seeking pre-sale legal advice, the absence of foreign countries categorizing XRP as a security, and the U.S. Financial Crimes Enforcement Network (FinCEN) classifying XRP as a currency, the executives were not acting with malicious intent. While the SEC might not consider good intentions essential, the court recognized its significance as a valuable asset.
Normally, the SEC had established itself as a seemingly domineering figure, adopting a "my way or the highway" approach. Similar to the numerous meetings held between Coinbase and the SEC, regardless of the measures taken or the well-intentioned initiatives, the prevailing notion was that if the SEC initiated a lawsuit, trouble was inevitable. The exoneration of the executives dealt a significant blow to this climate of fear. It became evident that goodwill is a vital factor in court, even if it is less important to the SEC.
Prometheum
Goodwill is crucial not only in court but also in garnering public support to alleviate pressure. While the SEC's pressure on the cryptocurrency sector has continued unabated, it has sparked a reaction. Consequently, a perception has been formed that obtaining approval from the SEC is unattainable regardless of one's efforts. However, this perception is not what the regulator desires. Whether the SEC granted approval to Prometheum, a cryptocurrency company, to alleviate pressure and change this perception remains uncertain. The company was granted an SPBD broker license, and its executives provided statements that echoed the SEC's views when appearing before Congress.
Through Prometheum, an attempt was made to spread the notion that as long as one adheres to the rules, even a cryptocurrency company can obtain approval from the SEC. It emphasized that the SEC is not cruel but a fair organization. However, interesting information about the company quickly surfaced on Twitter. Founded in 2017, the company had not launched any products in the six years since its establishment but had hired several officials from government agencies. Additionally, one of the company's partners is Wanxiang Blockchain, a subsidiary of a Chinese state-owned automotive company, Wanxiang, which had previously invested in Ethereum by purchasing 500,000 dollars' worth of ETH during its early stages.
Following these revelations, it is difficult to definitively determine whether the SEC granted approval to Prometheum to alleviate pressure. The company could also function as a Trojan horse. Notably, Wanxiang Blockchain is an important company that previously supported Vitalik Buterin and made a significant investment in Ethereum. The fact that Prometheum was founded in 2017 contradicts allegations of a hastily established shadow company by the SEC. Moreover, at a time when the fear of China is spreading across various sectors in the U.S., how it is possible for a company directly affiliated with the Chinese government to receive approval remains a separate question.
In conclusion, the victory in the Ripple case, the dubious approval process of Prometheum, Blackrock's submission of a spot BTC ETF application and its CEO's endorsement of BTC—all these occurrences are not mere coincidences. With the approaching U.S. presidential elections, the signs of a profound transformation in the sector in the United States are increasing. Expectations are also high that the SEC's iron fist will no longer be as prominent.
