According to Andrew Harris, Senior Platform Associate at Pantera Capital, the ruling by Analisa Nadine Torres, a U.S. district judge of the U.S. District Court for the Southern District of New York, could be a game-changer for the crypto industry.
Dan Morehead, who previously served as the Head of Macro Trading and CFO at Tiger Management, established crypto-focused investment firm Pantera Capital. The firm managed a global macro strategy that attracted over $1 billion from institutional investors. 2013 Pantera broke new ground by launching the first hedge and venture funds focused on blockchain technology in the United States.
Harris, who co-authored the XRP section of the latest issue of the firm’s newsletter (called “Blockchain letter”), dissected the court’s decision, which found that the majority of XRP token sales by Ripple were not securities. The ruling examined four distinct types of XRP sales: Institutional Sales, Programmatic Sales, Other Distributions, and CEO/CLO Sales.
Harris points out that Judge Analisa Torres applied the Howey test to these sales and concluded that only the Institutional Sales qualified as unregistered investment contracts. These sales were made to institutional investors who expected to profit from Ripple’s efforts to promote XRP. In contrast, the Programmatic Sales, which were “blind bid/ask transactions,” did not qualify as investment contracts. Buyers in these sales had no way of knowing they were purchasing XRP from Ripple, negating any expectation of profit based on Ripple’s efforts.
Harris also highlights that the Other Distributions of XRP to employees and third-party developers were not investment contracts. These distributions involved no investment of money. Similarly, the CEO/CLO Sales were not considered investment contracts for the same reasons as the Programmatic Sales.
According to Harris, the ruling has several far-reaching implications. It could potentially slow down the SEC’s enforcement actions against crypto issuers and trading platforms. It may also pave the way for the resumption of XRP trading on U.S. crypto exchanges like Coinbase, Kraken, and Gemini. However, the SEC has already requested permission to appeal the ruling, indicating that the legal battle is far from over.
Harris says this case marks the SEC’s first-ever loss concerning the security status of a crypto asset and is likely to influence other ongoing and future cases. The ruling provides a temporary respite for the beleaguered U.S. crypto industry, which has been under increasing regulatory scrutiny.
In the TL;DR section, Harris provides a nuanced take on several key questions:
- Harris clarifies that whether XRP is a security depends on the circumstances of each sale. Judge Torres didn’t label XRP itself as a security but focused on how it was sold.
- According to Harris, XRP sold on crypto exchanges was not deemed a security in this case. The SEC would need to prove that buyers knew they were purchasing from Ripple and expected profits from Ripple’s efforts, which they failed to do.
- Harris suggests that this ruling could lead many to believe that most crypto assets sold on exchanges are not securities. However, he cautions against premature celebration.
- He anticipates that U.S. crypto exchanges will likely resume trading XRP, especially given that some, like Coinbase, Kraken, and Gemini, already have.
- Harris notes that this was the SEC’s first loss concerning the security status of a crypto asset, and an appeal is likely. The SEC has already requested permission to appeal.
- Finally, Harris believes that this ruling could positively impact other crypto exchanges that are either under investigation or have been sued by the SEC, as it sets a precedent that may slow down the SEC’s enforcement efforts.