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Ripple’s Big Court Win Nonetheless Muddied Waters on Whether XRP Is a Security Deserving Tougher Regulation

Jun 27, 2024
    Ripple’s California victory muddies the waters on whether or not XRP can be considered a security.District court judges are not required to agree with rulings made by their peers in other cases.Lawyers say the lack of legal certainty for XRP and other digital assets will likely continue until there is a ruling from a higher court or regulatory certainty granted by Congress.
The Supreme Court ruling in the SEC vs. Ripple case regarding XRP‘s status as a security has left uncertainty and disagreement among legal professionals. While one district court, led by Judge Sarah Nettsham Hamilton, found that reasonable investors may have expected profits due to Ripple’s efforts, another district court, presided over by Judge Torres, determined that XRP is not a security under federal law. These conflicting decisions highlight the lack of legal and regulatory clarity surrounding crypto assets and their classification as securities. The ongoing debate underscores the need for further guidance from higher courts or legislation to provide clarity in this evolving industry. It’s important to note that district court rulings are not binding on each other, but they can serve as useful precedent until a definitive decision is made at an appellate or Supreme Court level. The chances of Ripple’s California case going to trial with small damages at stake are also considered slim-to-none, making a settlement more likely.In a significant triumph for Ripple, a judge dismissed the majority of a class action securities lawsuit against the company, resulting in a financial win.
As a researcher studying the regulatory landscape of cryptocurrencies in the United States, I’ve come across an intriguing development that highlights the ongoing uncertainty in this field. Recently, a judge made a statement suggesting that Ripple’s XRP might be classified as a security, which could lead to stricter regulation. This ruling contrasts with a high-profile decision from last year that largely dismissed the idea of XRP being a security.

On June 20, Judge Phyllis Hamilton of the United States District Court for the Northern District of California dismissed the majority of a class action lawsuit filed against Ripple and its CEO, Brad Garlinghouse. Only one state law claim brought by an individual plaintiff will move forward to trial.

The contested assertion – that Garlinghouse allegedly made misleading statements during a 2017 interview regarding the sale of XRP tokens, which plaintiffs claim were securities – represents a relatively insignificant amount, estimated at $174, compared to Ripple’s reported valuation of around $11 billion.
As a crypto investor, I can’t help but feel elated about the recent turn of events in the ongoing lawsuit against Ripple. Being a part of this community, the dismissal of all class action claims brings immense relief and joy. For those of us who invested in XRP over the past six years, whether we held onto it or sold at a loss, this outcome is undeniably a significant victory. The California judge presiding over the case has effectively shielded Ripple from potentially colossal damages, which is cause for celebration within the crypto sphere.
However, Hamilton’s decision introduced a complicating factor: she indicated that XRP could potentially be classified as a security, contradicting Judge Torres’ ruling from last year in which she determined that XRP was considered a security only when sold to institutional investors.
As a crypto investor, I’m always keeping an eye on judicial rulings that could impact the industry. The Torres ruling brought some much-needed clarity to the regulatory landscape for cryptocurrencies, especially regarding XRP. However, more recently, Hamilton’s ruling introduced a new perspective. While it doesn’t directly contradict Torres’ decision, it does add another perspective from a different district judge. Essentially, both rulings offer unique insights into how securities law applies to XRP and the crypto world at large.
When Hamilton disagreed with Torres, he unintentionally offered an additional perspective that could strengthen the argument of those maintaining that XRP, along with other cryptocurrencies, should be classified as securities, according to crypto legal experts.

If this all sounds confusing, that’s because it is – even to crypto lawyers.

A partial victory

As a crypto investor, I understand that Judge Hamilton ruled against the class action claims regarding XRP based on statutory time limits. This decision wasn’t influenced by his personal views on whether or not XRP qualifies as a security.
The court determined that certain claims brought forth were past the statute of limitations and others lacked sufficient merit to proceed to trial. In simpler terms, the favorable rulings for Ripple were not solely due to the belief that XRP is not classified as a security, which has been the main contention put forward by Ripple and its top executives in the ongoing legal proceedings.
As a researcher studying the legal implications of XRP, I employed the Howey Test, a crucial framework in U.S. securities regulation based on a Supreme Court decision, to assess whether XRP qualifies as a security. Applying this test, I came to the conclusion that XRP did not meet the third prong. Specifically, I could not reasonably assert as a fact that a reasonable investor would not have anticipated earning profits through other parties’ efforts when dealing with XRP.
Based on the perspective of cryptocurrency legal experts, it remains uncertain whether XRP qualifies as a security under the current regulatory framework.
“To put it simply, the determination of whether XRP qualifies as a security, particularly in regard to this secondary claim, remains open for debate according to Moish Peltz, a partner at Falcon, Rappaport and Berkman’s New York law firm,” is one way to paraphrase the original statement.

District court disagreements

According to Ripple’s executives, the recent decision by Judge Hamilton in the SEC case doesn’t reverse the previous ruling from 2023 that classified XRP as a non-security under federal law, as decided by Torres.
According to Judge Torres’ decision in the SEC case, XRP, on its own, is not classified as a security under federal law, as stated by Ripple’s Chief Legal Officer Stu Alderoty in an email. This ruling remains unchanged and cannot be disputed in Judge Hamilton’s courtroom.

Hamilton’s decision doesn’t directly contradict Torres’ ruling, but if the SEC decides to appeal its lawsuit against Ripple, they might use Hamilton’s decision as an alternative precedent. It’s worth noting that Hamilton isn’t the only judge in the Southern District of New York who has disagreed with Torres. Judge Jed Rakoff in a separate case, SEC vs. Terraform Labs, also expressed his disagreement with Torres’ ruling.

While it’s true that district courts may look to one another for guidance, they aren’t required to follow each other’s decisions. Instead, they retain the autonomy to make their own rulings until a higher court steps in with a definitive ruling.

A continued lack of clarity

Interviews with lawyers revealed a divided district court concerning the classification of XRP as a security during sales on cryptocurrency exchanges. This discord reflects a larger problem – the absence of clear-cut legal and regulatory guidelines determining if a specific crypto asset qualifies as a security.

“Jason Gottlieb, a partner at Morrison Cohen in New York and head of its digital assets practice, admitted that describing the applicable laws in this field is quite a challenge.”

When it comes to Ripple’s case, the opinions from various district courts show not only disparate outcomes but also distinct approaches for reaching those results. The complexity arises when attempting to compare and contrast these decisions.

One possible paraphrase for “Gottlieb added that since judges are reaching disparate decisions on cryptocurrency cases, it’s evident that the legal framework regarding cryptocurrencies remains unclear.” or “According to Gottlieb, the varying judgments in cryptocurrency-related cases demonstrate a lack of clarity in the current law regarding these digital assets.”

“He remarked that various district courts are expected to render disparate decisions on this matter, and even when they concur, their reasoning may differ. The legal landscape in this domain will remain unclear until these cases ascend to the appellate courts and eventually reach the Supreme Court.”

In the dynamic field of crypto, where legal frameworks are continually evolving, district court decisions may not be definitive but can provide valuable guidance.

As an analyst, I would express it this way: Following Hamilton’s ruling, SEC attorneys added the judgment to the case records against Binance in Washington, D.C., highlighting its relevance to similar legal matters.

Longo expressed skepticism towards the SEC’s decision to include Hamilton’s ruling in the Binance case, yet acknowledged that it was common practice in the crypto industry for parties engaged in litigation to issue notices of additional relevant decisions when such decisions emerge in other cases.

Longo explained that a significant portion of the legal framework for cryptocurrencies in this jurisdiction has been shaped by trials in lower courts. Consequently, court rulings on Howey-related crypto cases often influence similar cases heard in other courts. The legal landscape here hasn’t seen many new regulations or statutes; instead, precedents from trial courts have dominated the discourse.

As a researcher studying the crypto industry, I’ve observed that without clear regulations from Congress, we’re left with few options but to navigate the complexities of the legal system. This path, as highlighted by Longo and other legal experts, comes with significant financial and time commitments.

As a researcher examining the current legal landscape, I’ve noticed an intriguing comparison made by some observers. They suggest that the complex issues arising from cases involving advanced technologies, such as those explored in William Gibson’s novel “Neuromancer,” are being addressed at a pace reminiscent of Charles Dickens’ classic work “Bleak House.” This implies a lengthy and labored process with numerous delays and complications.

As an analyst looking back at a 2014 initial coin offering (ICO) case, I can say that this situation is significant due to its lasting implications. Ten years have passed since then, and we are still addressing related issues in district courts. The complexity of these cases means that we’ll likely be dealing with them for another five to ten years. Moreover, there’s the added consideration of how appellate courts and potentially even the Supreme Court will influence the outcomes.

A slim shot at trial

Based on the consensus among lawyers, it’s unlikely that Ripple’s California case will proceed to trial due to minimal potential damages for the plaintiff.

“Gottlieb noted that a large number of such cases rarely make it to trial. In instances where the monetary compensation is minimal, it benefits both parties to resolve the dispute outside of court through a settlement.”

As a researcher examining this situation, I can’t help but observe that both parties seem reluctant to engage in a costly trial over a relatively small monetary dispute. The prospect of compromise or settlement offers adds significant pressure on the plaintiff to reach an agreement, making it challenging to envision this case progressing beyond this point.

Lawyers for the plaintiff did not respond to CoinDesk’s request for comment.

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2024-06-28 22:26