The U.S. court’s decision to not try a part of the case against Ripple Labs has given a boost to the cryptocurrency market, particularly altcoins such as Cardano and Litecoin. The question of whether or not an asset can be considered a financial instrument is crucial, since it will determine whether the Securities Exchange Commission (SEC) has the authority to regulate asset trading.
In December 2020, the SEC sued Ripple Labs and two of its senior executives, alleging that XRP was a type of security. If someone were to sell XRP, the SEC would need to be notified, and the exchange where the offer is made would need to be registered.
In June 2023, the SEC will also sue Coinbase Global (NASDAQ: COIN), accusing the company of operating as an unregistered broker. U.S. District Judge Analisa Torres’ summary judgment was that institutional sales of unregistered securities are a type of sale. Ripple Labs’ marketing materials supported this view.
Judge Torres applied the SEC’s Howey Test to determine if XRP was a security. According to the SEC, an asset that meets the test for an investment contract is an investment in a joint enterprise where there is a reasonable expectation of profit made by others.
In her ruling, Judge Torres noted that secondary sales by individuals, which are basically second-hand sales on exchanges, did not meet the definition of security because the investor was not investing money in the “common enterprise.”
The issue of “other distributions,” where XRP is used to pay employees or vendors, will also be moved to trial. If an asset is not considered a security, the SEC would not need to be notified and the exchange does not need to be registered.
Barclays analysts Ramsey El-Assal, Benjamin Budish, and Needham analyst John Todaro all saw the judgement as positive for the market. El-Assal and Budish noted that marketing and context matter in determining whether an asset is a security, while Todaro sees it as a precedent that crypto token sales through exchanges, at least in the XRP case, did not violate securities laws.
Compass Point analyst Chase White also believes that the ruling will be a catalyst for higher prices, ETF approvals, and institutional adoption. White also expects Ether (ETH/USD) to gain, as well as altcoins, due to the lack of Bitcoin (BTC USD) to purchase, which could lead to a supply shock.
The court’s ruling has given White optimism that Bitcoin ETFs are on the way, as major financial institutions have filed applications for spot Bitcoin (BTCUSD) ETFs. He believes that any moves to the downside should be seen as a buying opportunity for crypto assets and crypto-related stocks.
