The cryptocurrency XRP has climbed 23% after a federal judge dealt its issuer, Ripple Labs, a softer blow than investors had feared. On Wednesday, the court announced that the blockchain payments firm must pay a civil penalty of $125 million for improperly selling its token to institutional investors. The penalty is just 6% of the $2 billion the Securities and Exchange Commission had hoped for.
“This is a victory for Ripple, the industry, and the rule of law. The SEC’s headwinds against the whole of the XRP community are gone,” Ripple’s CEO Brad Garlinghouse tweeted Wednesday.
The SEC asked for $2B, and the Court reduced their demand by ~94% recognizing that they had overplayed their hand. We respect the Court’s decision and have clarity to continue growing our company.
— Brad Garlinghouse (@bgarlinghouse) August 7, 2024
This is a victory for Ripple, the industry and the rule of law. The SEC’s…
XRP is trading at $0.62 as of Thursday morning ET. However, the rebound isn’t yet enough to recoup the long-term losses of the seventh-largest token. XRP remains down 2% year to date, a far cry from the wider market’s trajectory this year, as Bitcoin and Ethereum remain up 33% and 46%, respectively.
‘A blow to the SEC’
The SEC sued Ripple in 2020, alleging it broke the law by selling the token without registering it as a security. The regulator had sought more than $876 million in disgorgement (where a party is required to hand over its profits from illegal acts) and more than $198 million in interest, in addition to a $876 million civil penalty. Ripple strongly disputed the SEC’s $2 billion claim, contending it shouldn’t have to pay more than $10 million.
U.S. District Judge Analisa Torres ruled that the case “does not involve allegations of fraud, misappropriation, or other more culpable conduct.” Torres stated that the SEC had been unable to show that Ripple’s failure to register the sales of XRP with the regulator caused investors significant losses. Torres denied its request for more than $1 billion in disgorgement. Instead, the court based the penalty on a per-violation calculation method. This resulted in a $125 million penalty, rather than a fine based on Ripple’s profits from the relevant sales.
“It’s hard to view this as anything other than a blow to the SEC given it only got about 6% of the money it sought. At a minimum, this will hurt the agency’s settlement negotiating leverage in similar cases,” Elliott Stein, senior litigation analyst at Bloomberg Intelligence, told Fortune.
A final judgment. The Court rejects the SEC’s suggestion that Ripple acted recklessly and she reminds the SEC that this case did not involve any allegations of fraud or intentional wrongdoing, and no one suffered any financial harm. She rejects the SEC’s absurd demand for $2B in… https://t.co/RbwpBnoXJG
— Stuart Alderoty (@s_alderoty) August 7, 2024
The Howey Test
The crypto world had closely followed the case, regarding it as a key test of the SEC’s authority over the industry. In the absence of laws that define what cryptocurrencies are, their legal status has been a topic of debate in courtrooms across the country, and sometimes resulted in inconsistent conclusions.
The most pressing legal issue has been whether a given token is a security subject to the SEC’s oversight, or a commodity. In July, Judge Torres ruled that XRP was a security when sold to institutional investors, but is a commodity when sold to retail investors via exchanges.
The outcome of the securities versus commodities debates has turned on the application of the so-called Howey Test—the Supreme Court’s 1946 framework to determine whether a transaction qualifies as an investment contract under securities regulation. While Torres applied the test in her analysis, it may require a subsequent Supreme Court ruling or an act of Congress to provide full clarity on how the test should be applied to digital assets.
