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How the SEC's suit brought needed clarity to an obsolescent system
Ripple Labs was founded in 2012 and launched its signature token, XRP, on its proprietary blockchain network. Billed as a cross-border payment and remittance solution, it uses a protocol wherein a community of trusted nodes collectively seek consensus to validate transactions. This Proof-of-Association (POA) protocol makes the XRP Ledger (XRPL) quicker and more efficient than alternative networks like Bitcoin and Ethereum. To learn more about the XRP token and how the XRPL blockchain works, read this recent blog: What is XRP, and why does it matter?
How XRP got into hot water
As a part of Ripple Labs' route-to-market strategy for the XRP token, they determined that the cryptocurrency would be pre-mined, meaning that all 100 billion tokens that will ever exist were minted simultaneously. Of those, a percentage was distributed to founders and investors as part of their Initial Coin Offering (ICO). The remaining tokens are scheduled to be released onto the network at a rate of no more than one billion per month.
The SEC's case vs Ripple Labs
In December 2020, the Securities and Exchange Commission filed action against Ripple Labs and two of its executives, alleging they "raised over $1.3 billion through an unregistered, ongoing digital asset securities offering". In short, the SEC claimed that if XRP were a security, Ripple sold it in a manner that violated the Securities Act of 1933 and the Securities Exchange Act of 1934. But Ripple argued that XRP was not a security and should not be regulated as such.
The SEC uses the Howey Test to determine whether something is a security (or "investment contract"). To qualify as an investment contract, the following elements must be present in the offering:
- A contract, transaction, or scheme
- A person who invests their money in the contract, transaction, or scheme
- The person is led to expect profits solely from the efforts of the promoter or a third party
Regarding crypto sales, the first two requirements are always fulfilled. In any case where a cryptocurrency is undergoing testing to bifurcate it from a security, the third requirement of the Howey Test is what is evaluated.
Unable to predict the outcome of the legal case, all US-based exchanges de-listed the XRP token from 2020-2023 during the proceedings.
The ruling and implications for the crypto industry
The SEC v Ripple Labs case was heard by Judge Analisa Torres, and the court made its final ruling on July 13, 2023.
In the ruling, it was determined that, when sold on an exchange, XRP does not qualify as a security because the third requisite of the Howey Test is not present. When bought on an exchange, buyers of XRP do not expect that they will profit solely from the efforts of Ripple Labs.
However, Judge Torres found in a summary judgment that two individuals participating in Ripple Labs' ICO, former CEO Larsen and current CEO Garlinghouse, treated XRP as a security and made unregulated sales via the ICO. In her view, the third requisite of the Howey Test was present, as institutional investors did expect to profit from Ripple Labs' efforts.
Judge Torres ordered a trial by jury for Larsen and Garlinghouse over whether they are liable for aiding and abetting illegal securities sales to institutional investors who bought XRP. This trial will likely occur after the SEC's appeal of the initial ruling. In the meantime, XRP has been re-listed on most US-based exchanges, and Larsen and Garlinghouse remain free.
Despite the pending trial of Larsen and Garlinghouse, this decision is still favorable for the crypto cause, as it legitimizes crypto as a unique and independent instrument and raises awareness among congressional and judiciary leaders that additional definition is needed regarding viewing cryptocurrencies as securities.
Why it matters to Engiven's partners
Engiven recently added XRP to its robust list of 95+ accepted tokens, meaning nonprofit clients and crypto donors alike can now use XRP to the benefit of their world-changing missions. To view the complete list of Engiven's accepted tokens, visit our Accepted Tokens page. To donate XRP to any US-based registered 501(c)3 nonprofit, visit crypto.giving today and search for the organization you wish to support.
