Ripple’s Big Court Win Nonetheless Muddied Waters on Whether XRP Is a Security Deserving Tougher Regulation

Ripple
recently
scored
an
unequivocal
victory
from
a
dollars-and-cents
standpoint
in
a
class
action
securities
lawsuit,
with
the
judge
tossing
out
most
of
the
case.

But
the
judge
also
muddied
the
waters
on
a
bigger
issue,
diverging
from
a

high-profile
decision
last
year
by
hinting
that
Ripple’s
XRP
might
be
a
security
–
thus
deserving
closer
regulation.
The
conflicting
rulings
from
two
judges
are
a
symptom
of
a
bigger
problem:
the
lack
of
legal
and
regulatory
clarity
for
the
crypto
industry
in
the
U.S.
Until
that
clarity
is
granted,
either
by
Congress
or
a
ruling
from
a
higher
court,
there
will
likely
be
more
confusion
for
projects
like
Ripple
and
beyond.

On

June
20,
Judge
Phyllis
Hamilton
of
the
U.S.
District
Court
for
the
Northern
District
of
California
tossed
out
most
of
a
class
action
suit
Ripple
faced.
She
allowed
only
one
individual
state
law
claim
against
the
crypto
firm
and
its
CEO
Brad
Garlinghouse
to
proceed
to
trial.

The
remaining
claim
–
that,
during
a
2017
interview,
Garlinghouse
made
“misleading
statements”
in
connection
with
the
sale
of
the
XRP
token,
which
the
plaintiffs
say
were
securities
–
is
only
worth
$174,
small
potatoes
for
a
firm

estimated
to
be
worth
$11
billion.

That
outcome
is
objectively
a
huge
win
for
Ripple,
something

celebrated
by
the
company.
The
two
certified
classes
in
the
suit
included
all
investors
who
purchased
XRP
over
a
six-year
period
and
either
held
it
or
sold
it
at
a
loss.
In
throwing
out
all
the
class
action
claims,
the
California
judge
overseeing
the
case
shielded
Ripple
from
potentially
paying
enormous
damages.

But
there
was
the
fly
in
the
ointment:
in
her
ruling,
Hamilton
suggested
that
XRP
might,
in
fact,
be
a
security
–
breaking
with
the
opinion
of
District
Judge
Analisa
Torres
of
New
York’s
Southern
District,
who
ruled
last
year
in
a
separate
case
brought
by
the
U.S.
Securities
and
Exchange
Commission
that
XRP
was
only
a
security
when
sold
to
institutional
investors.

Torres’
ruling
was
widely
celebrated
as
a
step
toward
regulatory
clarity
for
the
crypto
industry,
as
well
as
a
potential
precedent
for
other
crypto
securities
cases.
Hamilton’s
ruling
doesn’t
undo
Torres’
ruling
–
as
Ripple
executives
have
pointed
out
–
but
she’s
the
second
district
judge
to
more
or
less
disagree
with
Torres’
assessment
of
XRP.

In
disagreeing
with
Torres,
Hamilton
potentially
provided
ammunition
in
the
form
of
another
alternative
precedent
for
those
who
believe
XRP
–
and
other
cryptocurrencies
–
are
securities,
crypto
lawyers
say.

If
this
all
sounds
confusing,
that’s
because
it
is
–
even
to
crypto
lawyers.

Hamilton’s
decision
to
toss
out
the
class
action
claims
was
based
on
statute
of
limitations
grounds,
and
had
nothing
to
do
with
whether
or
not
Hamilton
thinks
XRP
might
be
a
security.

“The
court
found
that
some
of
those
claims
were
time-barred
and
others
failed
to
raise
a
triable
issue,”
Joseph
Castelluccio,
a
partner
at
international
law
firm
Mayer
Brown
and
co-leader
of
the
firm’s
fintech
and
blockchain
practice
groups,
said
in
an
email.
“In
other
words,
the
Ripple-favorable
rulings
were
not
based
on
the
view
that
XRP
is
not
a
security,
which
has
been
the
central
argument
made
by
Ripple
and
two
of
its
executives
in
the
ongoing
cases.”

For
the
single
claim
she
allowed
to
proceed
to
trial,
Hamilton
applied
the
Howey
Test
–
a
pillar
of
U.S.
regulation
based
on
a
Supreme
Court
ruling,
used
to
determine
if
an
asset
is
a
security
or
not
–
to
XRP
and
found
that
it
failed
on
the
third
prong,
writing:
“The
[court]
cannot
find
as
a
matter
of
law
that
Ripple’s
conduct
would
not
have
led
a
reasonable
investor
to
have
an
expectation
of
profit
due
to
the
efforts
of
others.”

What
this
means,
according
to
crypto
lawyers,
is
that
we
still
don’t
definitively
know
whether
XRP
is
a
security
or
not.

“In
sum,
the
door
is
not
shut
on
the
question
of
whether
XRP
may
have
the
status
of
a
security,
at
least
in
relation
to
this
ancillary
cause
of
action,”
explained
Moish
Peltz,
a
partner
at
New
York
law
firm
Falcon,
Rappaport
and
Berkman.

Ripple
executives
have
said
that
Hamilton’s
ruling
doesn’t
undo
Torres’
2023
ruling
that
XRP
is
not
a
security
under
federal
law.

“In
the
SEC’s
case,
Judge
Torres’
ruled
that
under
federal
law
XRP
is
not
in
and
of
itself
a
security,”
Ripple
Chief
Legal
Officer
Stu
Alderoty
said
in
an
emailed
statement.
“That
ruling
stands
undisturbed
and
cannot
now
be
challenged
in
Judge
Hamilton’s
courtroom.”

It’s
true
that
Hamilton’s
ruling
does
not,
in
and
of
itself,
challenge
Torres’
ruling
–
though
the
SEC
is
likely
to
appeal
its
case
against
Ripple,
and
could
potentially
use
Hamilton’s
ruling
as
alternative
precedent.
Hamilton
is
not
the
first
judge
to
break
with
Torres
either.
Another
SDNY
judge,
Jed
Rakoff,
explicitly
disagreed
with
Torres’
ruling
in
a
separate
case,
SEC
vs.
Terraform
Labs.

But,
maybe
more
importantly,
the
differing
decisions
underscore
that
district
courts
do
not
have
to
agree
with
each
other.
Though
they
are
free
to
take
guidance
from
other
courts’
decisions,
they
are
not
obligated
to,
until
a
decision
is
made
by
a
higher
court,
like
an
appellate
court
or
the
Supreme
Court.

Lawyers
interviewed
for
this
story
agreed
that
the
district
court
split
over
whether
or
not
XRP
could
be
a
security
when
sold
on
exchanges
is
a
symptom
of
a
much
greater
issue:
the
general
lack
of
legal
and
regulatory
clarity
on
whether
a
given
crypto
asset
constitutes
a
security.

“It’s
actually
very
difficult
to
say
what
the
law
is
in
this
area,”
said
Jason
Gottlieb,
partner
at
New
York
law
firm
Morrison
Cohen,
and
chair
of
the
firm’s
digital
assets
practice.

“In
[Ripple’s]
case,
when
we’re
looking
at
various
differing
district
court
opinions,
they
have
not
just
different
results,
but
different
ways
of
getting
those
results,”
Gottlieb
added.
“I
think
there’s
a
lot
of
uncertainty
when
you
try
to
take
these
district
court
cases
and
put
them
against
each
other.”

Gottlieb
added
that
since
judges
are
coming
to
different
conclusions,
it’s
clear
the
law
is
not
well-developed
when
it
comes
to
cryptocurrencies.

“We’re
going
to
have
a
lot
of
district
courts
reaching
differing
conclusions
and,
even
when
they
reach
the
same
conclusions,
they
might
get
there
for
different
reasons,”
he
said.
“Until
all
these
cases
bubble
up
into
the
appellate
courts
and
ultimately
the
Supreme
Court,
we’re
not
likely
to
have
a
lot
of
clarity
on
the
law
in
this
area.”

But
even
if
district
court
rulings
aren’t
necessarily
binding,
they
can
serve
as
a
useful
precedent
in
an
industry
like
crypto,
where
the
law
is
still
being
developed.

After
Hamilton
issued
her
judgment,
lawyers
for
the
SEC
filed
the
decision
on
the
docket
as
a
notice
of
supplemental
authority
–
a
way
for
lawyers
to
call
attention
to
relevant
legal
issues
in
other
cases
–
in
their
case
against
Binance,
the
world’s
largest
crypto
exchange,
in
Washington,
D.C.

Longo
didn’t
put
much
stock
in
the
SEC’s
decision
to
file
Hamilton’s
decision
in
the
Binance
case,
but
said
that
it
has
become
a
frequent
practice
in
the
crypto
industry
for
parties
in
litigation
to
put
out
notices
of
supplemental
authority
when
there’s
a
potentially
relevant
decision
in
another
case.

“It’s
part
of
the
reality
of
the
fact
that
so
much
of
the
law
here
has
basically
been
forged
in
the
context
of
our
trial
courts,”
Longo
said.
“That’s
where
the
case
law
has
played
out.
There
hasn’t
been
a
new
regulation
or
statute.
…
I
think
it’s
a
symptom
of
the
way
the
law
has
evolved
here
that,
oftentimes,
any
trial
court
decision
on
the
issue
of
Howey
in
the
context
of
a
crypto
case
frequently
gets
cited
around
to
other
courts
with
decisions
on
those
kinds
of
issues
in
front
of
them.”

Without
regulatory
clarity
from
Congress,
the
crypto
industry
has
no
choice
but
to
search
for
answers
in
the
legal
system
–
a
process
that
Longo
and
other
lawyers
noted
was
expensive
and
time-consuming.

“The
courts
are
attempting
to
resolve
‘Neuromancer’
issues
at
a
‘Bleak
House’
pace,”
Gottlieb
joked.

“The
case
is
about
an
[initial
coin
offering,
or
ICO]
that
happened
in
2014.
So,
10
years
on,
we’re
dealing
with
some
of
these
cases,”
Gottlieb
added.
“We’ve
got
issues
going
on
today
that
we’re
still
going
to
be
grappling
with
in
district
courts
in
five,
10
years
down
the
road
–
and
that’s
not
even
counting
when
we’ll
see
results
from
the
appellate
courts
or
Supreme
Court.”

Lawyers
agreed
that
the
chances
of
Ripple’s
California
case
actually
making
it
to
trial
are
slim-to-none,
because
the
damages
the
plaintiff
can
win
are
very
small.

“Very
frequently,
these
cases
don’t
go
on
to
trial,”
Gottlieb
said,
adding
that
in
cases
where
the
damages
are
small,
both
sides
are
incentivized
to
settle
out
of
court.

“Neither
side
is
going
to
want
to
go
to
trial
and
spend
a
million
dollars
in
attorneys
fees
over
a
few
hundred
dollars,”
Gottlieb
said.
“If
there’s
an
offer
of
compromise
or
an
offer
of
settlement,
that
increases
the
pressure
on
the
plaintiff
to
settle.
…
It’s
hard
to
see
this
case
going
any
further.”

Lawyers
for
the
plaintiff
did
not
respond
to
CoinDesk’s
request
for
comment.

Correction
(June
28,
2024,
22:00):

Clarifies
nuance
in
second
paragraph
about
how
Judge
Phyllis
Hamilton
described
XRP
transactions
in
the
lens
of
the
case
she’s
overseeing.