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US regulators suffered a setback in their efforts to restrict the sale of cryptocurrencies on Thursday when a judge found that Ripple Labs did not violate securities law by selling digital tokens to members of the public.
The Securities and Exchange Commission filed a civil lawsuit against the cryptocurrency pioneer in December 2020, claiming Ripple sold $1.38 billion worth of its XRP token without filing required records under securities laws. securities.
Judge Analisa Torres dismissed part of the SEC's case Thursday, finding that registration requirements did not apply to approximately $757 million in tokens sold on digital asset exchanges as investors in retail did not buy XRP with a reasonable expectation of profiting from Ripple. Commercial activities. But the tokens sold to institutional investors were securities, she ruled.
The case involves a hotly debated provision of US securities law that prohibits the sale of “investment contracts” unless they are registered as securities with federal regulators.
Conceived during the Great Depression after a series of stock promotion scams cost thousands of Americans their life savings, the law became a crucial weapon in Gary Gensler's crackdown on a cryptocurrency industry. which the SEC Chairman said was "filled with fraud, scams, and abuse".
That crackdown widened last month when the SEC filed lawsuits claiming that two major cryptocurrency exchanges, Binance and Coinbase, also violated registration requirements. Both companies denied the allegations and said they intended to defend themselves in court.
The SEC's chances of prevailing in these lawsuits hinge, experts say, on its ability to persuade judges that a 21st-century fintech fits the vague definition of an "investment contract" enshrined in a law of 1933.
Torres offered both sides some hope with his decision in Manhattan on Thursday.
Siding with the SEC, she found that the sophisticated institutional investors who bought $729 million worth of the XRP token understood that “Ripple was throwing. . . potential benefits to be gained from Ripple's entrepreneurial and management efforts”.
Therefore, it classified the tokens purchased by institutional investors as investment contracts and found that Ripple violated securities law by not registering them.
But Torres added that "less sophisticated" investors who bought the same tokens on the exchange either weren't aware of Ripple's speech or hadn't "scoured the multiple documents and statements" needed to understand it.
Therefore, tokens purchased by largely retail investors were not investment contracts and did not need to be registered, Torres found.
Ripple's chief executive, Brian Garlinghouse, praised the decision on Twitter, saying his company was "on the right side of the law and will be on the right side of history." The price of XRP traded on Coinbase jumped 30% after the decision.
However, Torres ordered a jury to decide whether Garlinghouse and his predecessor Christian Larsen "knew or recklessly disregarded the facts that made Ripple's scheme [to sell unregistered securities to institutional investors] illegal".
Although U.S. district court rulings are generally not binding on other judges, the decision in the Ripple case provides an early indication of the challenges the SEC is likely to face as it pursues a blitzkrieg of enforcement actions against other cryptocurrencies.
Coinbase chief legal officer Paul Grewal told investors last month that “the whole SEC thing is about understanding what is. . .[an]investment contract.
"We think [it] clearly does not cover the types of tokens we list or the products and services we offer,” he said.