US Judge Rules Ripple’s Cryptocurrencies are Securities, But Only Sometimes

A U.S. District Judge ruled Thursday (July 13) that cryptocurrencies sold to institutional investors by Ripple are securities under federal regulations.

“Institutional buyers would have understood that Ripple was pitching a speculative value proposition for XRP with potential profits to be derived from Ripple’s entrepreneurial and managerial efforts,” U.S. District Judge Analisa Torres wrote in the decision, Bloomberg reported Thursday.

At the same time, Torres wrote that the tokens are not securities when sold to members of the general public, who are less sophisticated investors and may not have the same understanding of the transaction, according to the report.

The report characterized the decision as a “partial win” for the Securities and Exchange Commission (SEC), which sued Ripple and top executives in December 2020, while adding that Ripple “seemed to declare victory.”

“Thankful to everyone who helped us get to today’s decision — one that is for all crypto innovation in the U.S. More to come,” Ripple CEO Bradley Garlinghouse said, per the report.

The decision came following the SEC’s December 2020 suit accusing Ripple of misleading investors in XRP by selling more than $1 billion worth of the tokens without registering them, depriving investors of information about the cryptocurrency and Ripple’s business, according to the report. The judge ruled that many statements cited by the SEC may not have been shared with the broader public.

The SEC’s December 2020 suit alleged that Ripple Labs and its two top executives — Garlinghouse and Executive Chairman Chris Larsen — sold unregistered securities in the form of the XRP tokens its founders created in 2012 and demanded $1.3 billion in restitution.

The agency alleged “that Larsen and Garlinghouse were objectively reckless in believing that XRP was not a security, and that Ripple was on ‘fair notice’ that XRP was a security.”

As PYMNTS reported in October 2022, as the long-running legal battle was ongoing, the question of whether cryptocurrencies are or are not securities is key to the use of crypto as a payments currency both because it is far harder to issue digital assets if they must follow securities regulations and because paying with securities triggers a capital gains reporting requirement with the IRS.