Chris Dolmetsch looks back on the long legal drama surrounding Ripple Labs and XRP.
Ripple effects
One of the most-watched legal cases in crypto reached a major milestone last week when a federal judge ordered Ripple Labs Inc. to pay a $125 million civil penalty for selling its XRP token to institutional investors without registering it with the Securities and Exchange Commission. The penalty was a mere fraction of the $2 billion the agency had sought — and that could be good news for other crypto companies battling the SEC.
The Ripple case started in the heart of the pandemic, in December 2020, when the SEC sued Ripple and its top executives, co-founder Christian Larsen and Chief Executive Officer Bradley Garlinghouse, saying they “created an information vacuum” that allowed them to sell more than $1 billion worth of XRP into a market that only had information they chose to share about the cryptocurrency.
The lawsuit rallied the greater crypto industry around XRP. More than a dozen advocacy groups, including the Chamber of Digital Commerce and the Blockchain Association, wrote to US District Judge Analisa Torres in support of Ripple’s position.
Since then, the SEC has launched enforcement actions against a number of crypto firms, including Terraform Labs, Binance Holdings Ltd. and Coinbase Inc. But the Ripple case was viewed as a potential landmark that could set precedent regarding whether cryptocurrencies are securities that require their issuers to register the tokens with the SEC and make specific disclosures to investors.
The SEC had contended XRP was a security under the so-called Howey test, named after a 1946 Supreme Court ruling. Under Howey, a security exists if there’s an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.” Ripple contended that XRP didn’t meet that test because sales took place in the secondary market and there was no pooling of profits.
In July 2023, Torres found that XRP was a security when sold to institutional investors but not to the general public, noting that there was no evidence that retail buyers expected to share in Ripple’s profits and that many purchases were made through blind transactions via trading algorithms on exchanges.
The decision was widely viewed by the industry as a victory and a check on the SEC’s authority, although the regulator touted it as a validation of its approach and a confirmation that the securities laws can apply to cryptocurrencies.
The SEC has asked Torres to order Ripple to pay more more than $876 million in disgorgement and more than $198 million in interest, along with an $876 million civil penalty, saying the company has increased sales of the cryptocurrency since it was sued by the regulator, hasn’t accepted responsibility and intended to evade the law.
The judge issued an injunction barring Ripple from committing further violations of securities laws. But she denied the SEC’s bid for Ripple to disgorge profits from its sales, saying the case “does not involve allegations of fraud, misappropriation or other more culpable conduct” and that the SEC hadn’t shown that Ripple’s failure to register the sales with the agency caused investors substantial losses.
Ripple’s general counsel, Stuart Alderoty, said in a phone interview last week that the company respects the ruling and can pay the penalty “off our balance sheet with cash,” adding that “we’re glad to have this finally behind us.”
Still, the battle is not quite over yet, as the SEC could challenge the judge’s decisions on appeal. But the outcome could already be helping to shape the future of crytpo legal cases. Bloomberg Intelligence analyst Elliot Stein said Torres’ latest decision bodes well for Coinbase Global Inc. in its battle against the agency and could boost its odds of a favorable decision in that case.
