US Court Moves Forward with Securities Case

US Court Moves Forward with Securities Case


By Jakub Lazurek

21 Jun 2024 (27 days ago)

3 min read


A US court advances Ripple's securities case to trial, questioning whether XRP qualifies as a security under US law, which could reshape crypto regulations.

Ripple Labs faces new legal challenges as a US court advances a securities case involving alleged misleading statements to trial. The central question is whether XRP, Ripple's digital asset, qualifies as a "security" under US law, which could greatly influence crypto regulations.

The case, brought by Bradley Sostack, centers on statements made by Ripple CEO Brad Garlinghouse in a 2017 interview, where he claimed to be "very, very long" on XRP. Sostack argues these statements were misleading since Garlinghouse sold millions of XRP during that time. The key issue is whether XRP meets the criteria of security under the Howey test, a legal standard used to define investment contracts.

US District Court Judge Phyllis Hamilton denied Ripple's request for summary judgment on June 20, advancing the case to trial. Judge Hamilton noted that the defense did not provide enough arguments to dismiss the fourth cause of action, which involves misleading statements related to the sale of a security.

The lawsuit, filed in the California District Court, includes allegations against Ripple Labs, its subsidiary XRP, and Garlinghouse for unregistered offer and sale of securities and misleading statements. The trial's outcome could have significant implications for Ripple and the cryptocurrency industry regarding regulatory obligations.

Ripple argues that XRP does not meet the Howey test criteria for security. The Howey test determines if an asset is an investment contract based on criteria such as an investment of money in a common enterprise with profits expected from others' efforts. Despite this argument, the court found sufficient grounds to proceed to trial.

Despite the court's decision, XRP's price has remained relatively stable. Currently, XRP trades at $0.4901, down about 1.12% in the past 24 hours, indicating that investors are still assessing the potential outcomes.

This case differs from a prior ruling by Judge Analisa Torres of the Southern District of New York. Judge Torres found that Ripple's "Programmatic Sales" and other XRP distributions were not investment contracts, thus exempt from certain securities regulations. However, she ruled that Ripple's Institutional Sales of $728.9 million in XRP were unregistered investment contracts, violating the Securities Act.

This difference highlights the complexity of regulatory interpretations of digital assets. The upcoming trial could set new precedents, affecting how cryptocurrencies are regulated and marketed in the US.

The trial's outcome could have broad effects on the cryptocurrency industry. If XRP is classified as a security, it could impose new regulatory requirements on Ripple and other digital asset issuers, affecting operations and fundraising methods. Such a precedent could also increase scrutiny of other cryptocurrencies and their compliance with securities laws.

Moreover, the case could clarify how the Howey test applies to digital assets, providing clearer guidelines for companies in the regulatory landscape. This clarity is essential for fostering innovation while ensuring investor protection in the rapidly evolving crypto market.

The Ripple securities case highlights ongoing regulatory challenges in the cryptocurrency industry. As the trial progresses, its outcome could shape the future of digital asset regulation in the US. Ripple's defense must convincingly argue that XRP is not a security under the Howey test, while the plaintiff aims to prove the opposite.

The trial will explore the boundaries of US securities law in digital currencies, potentially setting new legal precedents. The resolution could impact not only Ripple's future but also the broader regulatory environment for cryptocurrencies.

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