In a shocking instance of 'saying the quiet part out loud,' Judge Analisa Torres found that Ripple Labs' sales of XRP token represented the illegal sale of unregistered securities when sold to sophisticated investors who should know better, but is totally not the illegal sale of unregistered securities when dumped on retail.
In a decision that has left legal experts and crypto enthusiasts scratching their heads, Judge Torres has effectively turned the Howey Test, a legal standard used to determine whether a transaction qualifies as an "investment contract," into a paradoxical riddle. The ruling, issued on July 13th, 2023, in the SEC v. Ripple Labs case, has thrown U.S. crypto token regulation into disarray.
The case revolved around whether Ripple Labs' decade-long distribution of XRP tokens constituted the sale of securities. Judge Torres divided Ripple's sales into three categories: institutional sales to hedge funds and the like, programmatic sales to retail directly on digital asset exchanges, and as a form of payment for services to employees and other service providers.
In a move that has left many real legal commentators baffled, Judge Torres found that institutional sales of XRP tokens by Ripple Labs were indeed the illegal sale of an unregistered security. However, she ruled that the programmatic sale of XRP tokens on a secondary market did not represent the illegal sale of unregistered securities.
Brad Garlinghouse, the founder of Ripple, was quick to express his delight at the ruling. "I'm so happy that I've been personally vindicated. After all, dumping this crap on retail is a time-honored tradition on Wall Street. I'm basically the same as Lloyd Blankfein," he reportedly said.
However, not everyone shares Garlinghouse's enthusiasm. Respected crypto lawyer at Brown Rudnick, Preston Byrne, likened the ruling to saying, "it's illegal to sell a car to a car dealer, but it's perfectly fine to sell the same car to a teenager with a newly minted driver's license."
The ruling has left the legal status of XRP in a state of quantum uncertainty, being both a security and not a security at the same time, depending on who it's sold to. This has led to Byrne coining the term "Schrodinger's Shitcoin" to describe the situation.
Other areas of the so-called 'crypto' community were ecstatic. One anonymous armchair legal analyst took time away from his hopium pipe to exclaim "so as long as we make sure the Blackrocks, Goldmans, etc. of the world aren't hurt, we can scam as many normies as we want!"
In the more staid halls of the law firms who represent "crypto" clients, enthusiasm was likewise high. "Billings will be off the chain, at least until this finally gets resolved on appeal," quipped one lawyer, who wished to remain anonymous.
However, it's important to note that Judge Torres did not rule on whether 99% of XRP transactions since 2017 were legal. She simply ruled that institutional sales of XRP were illegal, but that programmatic sales and other distributions of XRP were not. The programmatic sales, which accounted for less than 1% of global XRP trading volume since 2017, were conducted via algorithms in "blind bid/ask transactions," where "purchasers did not know who was selling."
Of course, this nuance is much too deep for most of Crypto Twitter, and even Coinbase reactivated XRP trading, completely missing that piece of the ruling.
The decision has also raised questions about the future of crypto token regulation in the U.S. Some fear that the ruling could lead to a new wave of token issuers seeking to exploit this legal gray area, while others hope that it will prompt Congress to step in and provide clearer regulations.
In the meantime, the crypto community is left to grapple with the implications of a ruling that seems to contradict the very principles of the Howey Test. As the dust settles, one thing is clear: the debate over what constitutes a security in the world of crypto tokens is far from over.