A Landmark Legal Victory for Cryptocurrency (but there’s more to it)

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In this article we dive into what happened with the recent Ripple vs SEC Ruling. We also look at other things like what is the Howey Test for securities and how this was not satisfied, What this means for other crypto projects and what this means for Australian crypto projects.

What Happened

In a landmark decision that has sent ripples across the cryptocurrency industry, a U.S. District Judge recently ruled that Ripple Labs did not violate federal securities law by selling its XRP token on public exchanges. This ruling has far-reaching implications not only for Ripple but also for the broader cryptocurrency industry.

The judge’s ruling hinged on the application of the Howey Test, a tool used to determine whether a transaction qualifies as an “investment contract” and thus falls under the purview of securities law. In this case, the judge ruled that Ripple’s XRP sales did not meet all the criteria of the Howey Test, particularly the expectation of profits derived from the efforts of others. This decision challenges the U.S. Securities and Exchange Commission’s (SEC) long-standing approach to cryptocurrencies and could potentially reshape the regulatory landscape.

While the SEC did secure a partial victory, with the judge finding that Ripple’s sales of XRP to sophisticated buyers amounted to unregistered sales of securities, the broader implications of the ruling favor the crypto industry. The decision sets a precedent that could be used in other legal cases involving the SEC and cryptocurrency companies. This could potentially challenge the SEC’s approach to regulation and enforcement in the crypto industry, paving the way for more regulatory clarity.

The ruling could also influence how tokens are classified in the future. If tokens are not considered securities, they would not be subject to the same stringent regulations as traditional securities. This could have a significant impact on how they are developed, marketed, and sold, providing a more conducive environment for innovation in the crypto space.

Moreover, the decision could boost investor confidence in cryptocurrency projects. If the court’s decision stands, it could be seen as a validation of the legitimacy of certain cryptocurrency projects, potentially attracting more investors to the space. This could lead to a surge in investment and development in the crypto industry.

The ruling also has implications for cryptocurrency exchanges. Following the ruling, exchanges that previously delisted certain tokens due to regulatory concerns might feel more comfortable re-listing these tokens. For example, Coinbase, one of the largest U.S. crypto exchanges, has already indicated that it would again allow trading of XRP on its platform.

While this ruling is specific to the U.S., it could indirectly influence other jurisdictions. Regulators worldwide often observe the regulatory practices and legal decisions in other countries when formulating their own regulations. Therefore, this ruling could potentially influence future regulatory decisions or legislative developments in countries like Australia, where the Australian Securities and Investments Commission (ASIC) has its own criteria for what constitutes a financial product and what requires a financial services license.

The Ripple case represents a significant milestone in the evolving relationship between cryptocurrencies and regulatory authorities. It underscores the need for clear, comprehensive, and appropriate regulations that balance the need for investor protection with the need to foster innovation in this rapidly evolving industry. As the crypto industry continues to mature, it is crucial for regulators, policymakers, and industry stakeholders to engage in open and constructive dialogue to shape a regulatory environment that supports the growth and development of this promising sector.

A Landmark Legal Victory for Cryptocurrency (but there’s more to it)

Below we dive into some of the burning questions that come from this ruling.

What does this ruling mean for other crypto projects and companies?

The ruling in the SEC vs Ripple Labs case could have significant implications for other cryptocurrency projects:

Precedent for Other Cases

The decision sets a precedent that could be used in other legal cases involving the SEC and cryptocurrency companies. If upheld, it could challenge the SEC’s approach to regulation and enforcement in the crypto industry.

Regulatory Clarity

The ruling could push for more regulatory clarity in the cryptocurrency space. It might encourage lawmakers to establish clear rules and regulations for digital assets, which could help cryptocurrency projects operate with more certainty and less fear of regulatory backlash.

Token Classification

The decision could influence how tokens are classified in the future. If tokens are not considered securities, they would not be subject to the same regulations as traditional securities, which could have a significant impact on how they are developed, marketed, and sold.

Investor Confidence

The ruling could boost investor confidence in cryptocurrency projects. If the court’s decision stands, it could be seen as a validation of the legitimacy of certain cryptocurrency projects, potentially attracting more investors to the space.

Re-listing of Tokens

Following the ruling, exchanges that previously delisted certain tokens due to regulatory concerns might feel more comfortable re-listing these tokens. For example, Coinbase has already indicated that it would again allow trading of XRP on its platform.

However, it’s important to note that the implications could vary depending on the specific circumstances of each cryptocurrency project, including their structure, the way their tokens were sold, and the jurisdictions they operate in.

What is the Howey Test and how did it not get satisfied?

The Howey Test is a test created by the Supreme Court for determining whether certain transactions qualify as “investment contracts.” If so, then under the Securities Act of 1933 and the Securities Exchange Act of 1934, those transactions are considered securities and subject to certain disclosure and registration requirements. The test was created in the 1946 Supreme Court case, SEC v. W.J. Howey Co.

The Howey Test asks whether a transaction is an investment contract by applying the following four criteria:

  1. It is an investment of money.
  2. There is an expectation of profits from the investment.
  3. The investment of money is in a common enterprise.
  4. Any profit comes from the efforts of a promoter or third party.

All four conditions must be met for a transaction to be considered a security.

In the case of Ripple Labs, the judge ruled that Ripple’s XRP sales on public cryptocurrency exchanges were not offers of securities under the law, as purchasers did not have a reasonable expectation of profit tied to Ripple’s efforts. The sales were described as “blind bid/ask transactions,” in which buyers “could not have known if their payments of money went to Ripple, or any other seller of XRP.”

This ruling suggests that the judge did not believe that the XRP sales satisfied the third and fourth criteria of the Howey Test. The buyers were not investing in a common enterprise with Ripple, and any profit they might realise would not necessarily come from the efforts of Ripple. Therefore, the sales did not meet all four conditions of the Howey Test and were not considered securities under this law.

What does that mean for Australia?

The ruling in the SEC vs Ripple Labs case is specific to the United States and is based on U.S. securities laws. Therefore, it does not directly affect other jurisdictions like Australia. Each country has its own set of laws and regulations regarding cryptocurrencies and what constitutes a security.

In Australia, the Australian Securities and Investments Commission (ASIC) is the regulatory body that oversees securities and financial markets. ASIC has its own criteria for what constitutes a financial product and what requires a financial services license.

However, regulatory decisions in major markets like the U.S. can have an indirect influence on other jurisdictions. Regulators worldwide often observe the regulatory practices and legal decisions in other countries when formulating their own regulations. Therefore, while the Ripple case does not directly affect Australian law, it could potentially influence future regulatory decisions or legislative developments in Australia and other countries.

It’s also worth noting that many cryptocurrency projects operate globally, so a regulatory decision in one jurisdiction can have practical implications for a project’s operations in other jurisdictions. For example, if a token is deemed a security in the U.S., platforms in other countries that wish to avoid potential legal issues with the U.S. might choose to delist the token or otherwise change their handling of it.

As always, any specific legal or regulatory concerns should be discussed with a qualified legal professional or directly with the relevant regulatory body.

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Mark
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Mark drives innovation with his deep understanding of AI, blockchain, and data technologies. His experience spans over 15 years of contributions to finance, technology, and operational strategy across Australia, Europe, and North America.

In 2021, he transitioned from Head of Data and Technology at a leading Australian accounting firm to startups. Prior to this, he worked in equity and macroeconomic research in the capital markets space.

Mark brings a passion for data and insights to NotCentralised. His understanding of AI and blockchain technology is central to the development of workplace productivity and financial system modernisation products, including SIKE and Layer-C. Mark’s dynamic and solutions-focused methods enable the navigation of complex technological landscapes and new market potentials.

Mark holds an Executive Master’s and a Bachelor of Commerce. He led the creation of the Australian DeFi Association and serves on the advisory board for the Data Science and AI Association of Australia. His commitment to such communities demonstrates his enthusiasm for emerging technologies and vision of positive change through technology adoption.

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In 2020, Nick transitioned into startups, bringing extensive experience in asset management and corporate advisory from roles including Director, Head of Australian Fixed Income at Abrdn and Managing Director, Head of Corporate Credit at Gresham Partners. His expertise extends to client management across the government and private sectors.

With a First Class degree in Law and Criminology and Chartered Financial Analyst experience since 2002, Nick is known for his energetic and creative approach, quickly appraising business models and identifying market opportunities.

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Arturo has built and sold technology startups across Europe, following quant derivatives roles in global investment banks. His prior experience includes data projects for the NHS in the UK, Strategic Technology Advisor at Land Insight, and Senior Advisor to OpenInsight, where he built predictive models for vessel usage in commodity markets.

A mathematics and statistics graduate from Stockholm University, Arturo’s early grounding in logic problems and data manipulation techniques is evident in his practical applications. His work building equity derivative pricing models for Merrill Lynch and Royal Bank of Scotland showcased Arturo’s highly specialised skillset.

Arturo relocated from London to Australia in 2020. Beyond NotCentralised, his passion for technology and industry involvement extends to the Australian DeFi Association, which he co-founded, and regular contributions to the Data Science and AI Association.