The lengthy three-year legal battle between Ripple Labs and the U.S. Securities and Exchange Commission (SEC) is finally showing signs of resolution.
A recent ruling from the U.S. District Court for the Southern District of New York declared that certain uses of XRP—such as offering it to investors, distributing it as grants, or transferring it to executives—do not qualify as securities transactions.
This development acted as a major catalyst for the crypto market. Bitcoin and Ethereum, among other major cryptocurrencies, saw immediate price increases, with Bitcoin climbing to a new yearly high of $31,657. XRP, the token most directly affected, surged by over 90% in a short period. Many industry observers have hailed the decision as a milestone victory for regulatory clarity in the crypto space.
Why This Case Matters
To understand the significance, we must look at Ripple’s role in the industry.
Ripple is a U.S.-based fintech company that uses blockchain technology and its native cryptocurrency, XRP, to facilitate international payments and money transfers. Its goal is to connect banks, payment providers, and digital asset exchanges to make global transactions faster and more affordable. Despite its legal challenges, Ripple has continued to grow and now serves over 300 institutional clients, including major names like Standard Chartered, Santander, and MoneyGram.
Ripple’s vision is to use XRP as a bridge asset for global financial institutions, aiming to revolutionize cross-border payments. Ambitious visions often attract top-tier investors, and Ripple’s backing is no exception.
The company has raised approximately $290 million over six funding rounds. Early supporters included Google Ventures, Andreessen Horowitz, and IDG Capital Partners. Later, traditional financial entities such as Santander InnoVentures, CME Ventures, Standard Chartered, and Accenture joined as investors. In 2019, Ripple secured a $200 million Series C round led by Tetragon, SBI Holdings, and Route 66 Ventures, boosting its valuation to $10 billion. By 2020, it was ranked as the fourth most valuable fintech company globally by CBInsights.
Despite strong institutional support, Ripple has always been mired in controversy—particularly regarding XRP. Although the company publicly promoted XRP as core to its strategy, its enterprise payment solutions—xCurrent, xRapid, and xVia—launched in 2018, had little to do with the token. In fact, only xRhad any connection to XRP, and even then, many of its banking partnerships did not involve the cryptocurrency.
At the same time, the company’s executives and the organization itself maintained an ambiguous relationship with XRP in the secondary market. Of the 100 billion XRP initially created, 20% was allocated to the founders—a setup that raised concerns early on.
According to Whale Alert, former Ripple CTO Jed McCaleb held up to 8 billion XRP. Between 2014 and 2019, he sold approximately 1.05 billion XRP at an average price of $0.0129, totaling around $135 million. After leaving the company, he received an additional 100 million XRP as part of a settlement.
Ripple’s own 2019 market report revealed that the company sold $500 million worth of XRP that year through over-the-counter (OTC) transactions, including $169 million in the first quarter alone. During the same period, Owler estimated Ripple’s total revenue at $652 million. This means nearly 77% of its revenue came from XRP sales, making the token a significant source of income.
These repeated sell-offs and cash-outs frustrated investors and eventually drew regulatory scrutiny. As Ripple’s influence grew, it became an inevitable target for the SEC.
The Legal Battle Unfolds
On December 21, 2020, the SEC filed a lawsuit against Ripple Labs, CEO Brad Garlinghouse, and co-founder Chris Larsen. The Commission alleged that they had raised $1.38 billion through the sale of unregistered securities—specifically, 14.6 billion units of XRP.
Ripple formally responded on January 29, 2021, denying that XRP was a security and accusing the SEC of harming XRP holders.
The SEC amended its complaint on March 5, 2021, adding allegations that Garlinghouse and Larsen had personally profited by approximately $600 million from XRP sales between 2017 and 2020.
This was not the first time the SEC had pursued legal action against a crypto project. Between 2017 and 2020, the agency filed suits against more than 31 entities, including well-known projects like Tezos, Block.one, and Telegram. Most projects chose to settle and pay fines to avoid prolonged legal battles and market panic. During this period, the SEC collected over $140 million in penalties.
Ripple, however, decided to fight back. The company’s leadership was adamant that they had not broken any laws. Garlinghouse stated, “We are in the right, and we will fight and win this battle in court to clarify U.S. rules.” Thus began a three-year legal showdown that would have implications for the entire crypto industry.
The Howey Test and Regulatory Definitions
The SEC based its case on the Howey Test, a 75-year-old legal framework used to determine whether an asset qualifies as a security. The test checks four criteria:
- Is there an investment of money?
- Is there a common enterprise?
- Is there an expectation of profit?
- Do profits depend solely on the efforts of others?
Ripple argued that XRP should be classified as a commodity, like gold or silver, and that its programmatic sales on exchanges were sufficiently decentralized to avoid being labeled a security. The company even challenged the SEC to explain why Bitcoin and Ethereum were not being treated as securities.
The distinction between a commodity and a security is crucial. Assets classified as securities face stricter disclosure requirements and regulatory oversight—a prospect that many in crypto see as a threat to the industry’s foundational principles. Commodities, on the other hand, are subject to lighter regulation.
This jurisdictional battle between the SEC and the Commodity Futures Trading Commission (CFTC) has intensified in recent years. The collapse of FTX further complicated matters, ultimately strengthening the SEC’s hand. In June of this year, the agency sued both Coinbase and Binance, alleging they violated securities laws, and labeled more than 60 cryptocurrencies as securities.
The Court’s Decision and Its Implications
In a surprising turn of events, Ripple won a partial victory. The court ruled that XRP itself is not a security. Programmatic sales and other distributions of XRP did not constitute offers or sales of investment contracts. However, the court agreed with the SEC that Ripple’s institutional sales of XRP were indeed unregistered securities transactions.
In simpler terms, sales of XRP to institutional investors in private placements were deemed securities offerings, but secondary market sales on exchanges were not.
This distinction is strategically important, especially for companies like Coinbase, which is currently facing its own legal challenges with the SEC. If XRP is not considered a security in secondary trading, other tokens like SOL, ADA, MATIC, and FIL—which are also under scrutiny—might receive similar treatment.
The market reacted enthusiastically. The price of XRP jumped from $0.47 to $0.64 within a day, at one point gaining over 35% in a single hour. Coinbase’s stock price also rose significantly, climbing 24.49% from around $84 to over $107.
The ruling may also improve the prospects for Bitcoin exchange-traded funds (ETFs). The SEC has repeatedly rejected ETF proposals, citing concerns about market manipulation and a lack of surveillance agreements. If the underlying assets are not classified as securities, the approval process could become much smoother.
Limitations and Uncertainties
It is important to note that the court did not make a blanket statement about XRP’s status. Instead, it evaluated different distribution methods separately. The court agreed with the SEC that institutional sales violated securities laws but found that programmatic sales did not, due to their automated and dispersed nature. Other distributions, such as grants and executive transfers, were also exempted.
The court explicitly stated that it was not ruling on whether secondary market sales of XRP constituted investment contracts. The SEC expressed satisfaction with parts of the decision, particularly the endorsement of the Howey Test in crypto transactions, and announced it would continue to review the ruling.
The SEC retains the right to appeal, and in the U.S. legal system, appellate courts frequently overturn lower court decisions.
The fight over regulatory jurisdiction is far from over. The SEC has both financial and philosophical incentives to maintain control. A look at its finances reveals that a significant portion of its revenue comes from fines and penalties. In 2022, the agency’s total assets grew by $1.9 billion, largely due to enforcement activities. That same year, it ordered violators to pay a record $6.439 billion in penalties.
SEC Chairman Gary Gensler has been a vocal critic of the crypto industry, repeatedly calling for stricter oversight. For both principled and practical reasons, the agency is unlikely to relinquish its authority easily.
What the Ruling Means for the Future
If the court’s interpretation holds—that secondary market sales do not violate securities laws—this could be a major positive for crypto exchanges. To comply with regulations, projects might need to structure their fundraising differently, perhaps through decentralized autonomous organizations (DAOs) or by relying more heavily on exchanges. However, this would also require a clear separation between the project itself and its associated token, which could make it harder for new initiatives to survive and grow.
In a regulatory environment that is increasingly hostile, Ripple’s partial victory offers a glimmer of hope. It has provided the crypto market with a temporary respite and a reason to celebrate. But the larger battle is far from won.
The revival of the crypto market may ultimately depend on broader regulatory clarity and more decisive legal and legislative developments.
Frequently Asked Questions
What was the SEC’s case against Ripple about?
The SEC accused Ripple of conducting an unregistered securities offering by selling XRP to investors. The agency claimed that XRP met the criteria of a security under the Howey Test.
How did the court rule in the Ripple case?
The court ruled that institutional sales of XRP were securities transactions but that programmatic sales on exchanges were not. It also exempted other distributions like grants and employee transfers.
Why is this case important for the crypto industry?
The outcome could influence how other cryptocurrencies are regulated. If XRP is not considered a security in secondary trading, it sets a precedent that may benefit other tokens and exchanges.
What is the Howey Test?
The Howey Test is a legal standard used to determine whether an asset is a security. It assesses whether there is an investment of money in a common enterprise with an expectation of profits derived from the efforts of others.
Can the SEC appeal the decision?
Yes, the SEC has the right to appeal the ruling. The case could be reconsidered by a higher court, which might reverse or modify the decision.
How did the market react to the news?
The price of XRP increased by over 90% shortly after the ruling. Other major cryptocurrencies and related stocks, like Coinbase, also saw significant gains.
For those interested in tracking how this evolving situation might impact trading strategies and market dynamics, you can explore real-time analysis tools that provide up-to-date insights.