Ripple’s big court victory has however muddied the waters on whether XRP is a security worthy of stricter regulation.

• Ripple’s win in California muddies the waters on whether XRP can be considered a security, cryptocurrency lawyers say.

• District court judges are not required to accept the judgments of their colleagues in other cases.

• Lawyers say the lack of legal certainty for XRP and other digital assets will likely continue until there is a ruling from a higher court or regulatory certainty granted by Congress.

Ripple recently scored a clear financial victory in a securities class action lawsuit, with the judge dismissing most of the case.

But the judge also muddied the waters on a larger issue, departing from a high profile decision last year, suggesting that Ripple’s XRP might be a stock, and therefore worthy of more stringent regulation. The conflicting rulings by two judges are a symptom of a larger problem: the lack of legal and regulatory clarity for the cryptocurrency industry in the United States. Until that clarity is provided, whether by Congress or a higher court ruling, there will likely be more confusion for projects like Ripple and beyond.

ON June 20thJudge Phyllis Hamilton of the U.S. District Court for the Northern District of California has dismissed most of a class action lawsuit filed by Ripple. She allowed only one individual state law claim against the cryptocurrency company 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 allege were securities — is worth just $174, a pittance for a company estimated at $11 billion.

This result is objectively a great victory for Ripple, something celebrated by the company. The two classes filed in the lawsuit included all investors who had purchased XRP over a six-year period and held or sold it at a loss. In dismissing all class-action claims, the California judge overseeing the case protected Ripple from potentially paying out massive damages.

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

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

The story continues

In his disagreement with Torres, Hamilton has potentially provided ammunition in the form of yet another alternative precedent for those who believe that XRP (and other cryptocurrencies) are securities, according to cryptocurrency lawyers.

If this all seems confusing, that’s because it is, even for cryptocurrency lawyers.

A partial victory

Hamilton’s decision to dismiss the class action claims was based on statute of limitations grounds and had nothing to do with whether or not Hamilton believed XRP could be a security.

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

For the only claim that allowed for a trial, Hamilton applied the Howey test, a cornerstone of U.S. regulation based on a Supreme Court ruling used to determine whether an asset is a security or not, to XRP and found that it failed the third prong, writing: “The [court] cannot hold, as a matter of law, that Ripple’s conduct would not have induced a reasonable investor to expect a profit from the efforts of others.”

This means, according to cryptocurrency experts, that we still don’t know for sure whether XRP is a security or not.

“In short, the door is not closed on whether XRP can have security status, at least as it relates to this ancillary cause of action,” explained Moish Peltz, a partner at the New York law firm Falcon, Rappaport & Berkman.

Disagreements between district courts

Ripple executives said Hamilton’s ruling does not overturn Torres’s 2023 ruling that XRP is not a security under federal law.

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

It’s true that Hamilton’s ruling doesn’t challenge Torres’s ruling per se, though the SEC will likely appeal its case against Ripple and could potentially use Hamilton’s ruling as an alternative precedent. Hamilton isn’t the first judge to break with Torres. Another SDNY judge, Jed Rakoff, explicitly disagreed with Torres’s ruling in a separate case, SEC v. Terraform Labs.

But perhaps more importantly, the differing decisions underscore that district courts don’t have to agree with each other. While they are free to draw on the decisions of other courts, they are not required to do so until a higher court, such as an appellate court or the Supreme Court, issues a decision.

A continuing lack of clarity

Lawyers interviewed for this article agree that the district court’s split on whether XRP can be considered a security when sold on an exchange is symptomatic of a much larger problem: a general lack of legal and regulatory clarity about whether or not a given cryptocurrency is a security.

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

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

Gottlieb added that since judges reach different conclusions, it is clear that the law is not well developed when it comes to cryptocurrencies.

“There are going to be a lot of district courts that come to different conclusions, and even when they come to the same conclusions, they may come to them for different reasons,” he said. “Until all these cases get to the appellate courts and ultimately the Supreme Court, we’re unlikely to have much clarity on the law in this area.”

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

After Hamilton issued his ruling, SEC lawyers filed the decision on the docket as a supplemental notice of cause, a way for the lawyers to draw attention to legal issues relevant in other cases, including their case against Binance, the world’s largest cryptocurrency exchange, in Washington, D.C.

Longo didn’t give much weight to the SEC’s decision to dismiss Hamilton’s ruling in the Binance case, but he said it’s become common practice in the cryptocurrency industry for litigants to issue supplemental notices when there’s a potentially relevant decision in another case.

“It’s part of the reality that a lot of the law here was basically shaped in the context of our lower courts,” Longo said. “That’s where the case law developed. There was no new regulation or statute. … I think it’s a symptom of the way the law has evolved here that, oftentimes, any lower court decision on the Howey issue in the context of a cryptocurrency case is often cited in other courts that have decisions on those kinds of issues before them.”

Without regulatory clarity from Congress, the cryptocurrency industry has no choice but to seek answers in the legal system, a process that Longo and other lawyers have stressed is costly and time-consuming.

“The courts are trying to resolve the issues of ‘Neuromancer’ at the same rate as ‘Bleak House,’” Gottlieb joked.

“The case concerns a [initial coin offering, or ICO] “That happened in 2014. So 10 years later, we’re dealing with some of these cases,” Gottlieb added. “We have issues going on today that we’re still going to be dealing with in the district courts five, 10 years from now, and that’s not even counting when we see the results from the appellate courts or the Supreme Court.”

A small attempt at a process

Lawyers agreed that the chances of Ripple’s California case actually going to trial are slim to none, because the damages the plaintiff can recover are so small.

“Very often, these cases don’t go to trial,” Gottlieb said, adding that in cases where the damages are small, both parties 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 instead of a few hundred dollars,” Gottlieb said. “If there’s a compromise offer or a settlement offer, that increases the pressure on the plaintiff to settle. … It’s hard to see this case going any further.”

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

Correction (June 28, 2024, 10:00 p.m.): He clarifies a nuance in the second paragraph about how Judge Phyllis Hamilton described XRP transactions in the context of the case she is overseeing.

Source