What The XRP Security Ruling Means For Bitcoin, Ethereum, And BNB

On Thursday July 13, US judge Analisa Torres of the U.S. District Court of the Southern District of New York ruled that Ripple Labs’ XRP XRP token is a security when offered for institutional sales and not a security when sold to the broader public termed as programmatic sales.

NEW YORK, NY - FEBRUARY 07: Dan Roberts, Brad Garlinghouse, and Andy Serwer attend the Yahoo ... [+] Finance All Markets Summit: Crypto on February 7, 2018 in New York City. (Photo by Eugene Gologursky/Getty Images for Yahoo Finance/Oath )

After the ruling, XRP rallied from $0.45 to $0.77 within a few hours. That was a 71% rally as the ruling meant a huge win for Ripple Labs and the general public that trades XRP. If XRP trading for retail is now classified as a digital commodity, it will not be subject to securities laws.

The judge carefully examined the case using the Howey Test. The US Supreme Court devised the Howey Test to determine whether certain transactions qualified as investment contracts. If so, those transactions are deemed securities under the Securities Act of 1933 and the Securities Exchange Act of 1934, and are thus subject to specific disclosure and regulatory requirements.

The Howey Test defines an investment contract with four main conditions. First, there has to be an investment of money. Second, there has to be an expectation of profit from the investment. Third, the investment of money has to be in a common enterprise. Lastly, the profits have to come from the activities of others. In a crypto context, the activities of others implies the company or individuals that actively promote a cryptocurrency project to create value.

The main point of contention was the expectation of profit from the activities of others. The lawyers argued that the condition was subjective and that there is a large number of retail buyers who didn’t expect a profit from the activities of Ripple Labs and that they (traders) strongly believe they didn’t buy a security.

This ruling doesn’t affect Bitcoin BTC since Bitcoin doesn’t pass the Howey Test. The SEC chair Gary Gensler is on record saying that Bitcoin is not a security and that has never been an issue. Ethereum, on the other hand, has been on the spotlight of a heated debate among the crypto community about whether it is a security or a digital commodity.

When testifying to the Financial Services Committee (FSC) regarding the SEC's approach to regulating cryptocurrency in April, Gary Gensler dodged the question of whether Ethereum ETH is a security. The XRP decision raises the prospect that other cryptocurrencies, such as Ethereum, may soon be viewed similar to XRP.

A key challenge for other cryptocurrencies remains the method with which their initial offerings were issued. If initial allocations involved selling coins or tokens directly to the public, then such cryptocurrencies pass the Howey Test and will potentially be classified as securities.

Cryptocurrencies like Eth, BNB BNB , Cardano ADA , EOS EOS , Cosmos, and Tezos XTZ sold 50% or more of their initial supply to the public. This separates their case from Bitcoin. While Ripple Labs is still expected to answer for the $1.3 billion it raised in 2013 to promote XRP and onboard firms and partners, the XRP sold to the public through exchanges is off the jurisdiction of the SEC.

This means that there is a workaround for other crypto firms in which the initial offering transactions might be separately legislated as securities offerings and securities regulations applied to those transactions while sales through exchanges may not be classified as securities.

The SEC argues that a majority cryptocurrency companies are undermining the traditional financial system by avoiding regulation. In addition, the SEC said that cryptocurrency companies do not provide the necessary investor protections and tranparency.

While this may seem like a big win for the crypto industry, it is important to note that there is a need for increased transparency, investor protection, and regulation to avoid events similar to what happened to FTX and Terra LUNA ecosystem investors.