Regulation
Ripple’s Grand Court Still Wins Over Muddy Waters on Whether XRP Is a Stock Deserving of Stricter Regulation
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 broader issue, diverging from a high profile decision last year suggesting that Ripple’s XRP might be a stock, thus deserving of tighter regulation. The conflicting rulings of two judges – one calling XRP a security, the other mostly not – are a symptom of a larger problem: the lack of legal and regulatory clarity for the cryptocurrency industry in the United States until such clarity is granted, 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 the majority of a class action lawsuit filed by Ripple. She allowed only an 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 claim were securities – is worth just $174, a pittance for a company estimated to be worth $11 billion.
This result is objectively a big win for Ripple, something celebrated by the company. The two classes filed in the lawsuit included all investors who purchased XRP over a six-year period and held or sold it at a loss. By dismissing all class-action lawsuits, the California judge overseeing the case protected Ripple from paying potentially massive damages.
But there was a fly in the ointment: 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 US 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.
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, cryptocurrency advocates say.
If this all seems confusing, that’s because it is, even for cryptocurrency lawyers.
Hamilton’s decision to dismiss the class action lawsuits was based on statute of limitations grounds and had nothing to do with whether or not Hamilton believes XRP can 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 international law firm Mayer Brown and co-leader of the practice groups, said in an email fintech and blockchain of the studio. “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 made by Ripple and two of its executives in the ongoing cases.”
In the only case he allowed to proceed to 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 test, 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 lawyers, 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.
Ripple executives said Hamilton’s ruling does not overturn Torres’ 2023 ruling that XRP is not a security under federal law.
“In the SEC case, Judge Torres ruled that, under federal law, XRP is not itself a security,” Ripple Chief Legal Officer Stu Alderoty said in an emailed statement. “This ruling remains unchanged 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.
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] In this case, when we look at the different opinions of the district courts, we get not only different results, but different ways to get 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 as judges come to different conclusions, it is clear that the law is not well developed regarding 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 developing.
After Hamilton issued his ruling, SEC lawyers filed the decision on the record as a supplemental clearance notice, a way for lawyers to call attention to legal issues relevant in other cases, in their case against Binance, the largest cryptocurrency exchange in the world, in Washington, DC
Longo didn’t put much stock in the SEC’s decision to dismiss the Hamilton decision in the Binance case, but said it has become a frequent practice in the cryptocurrency industry for litigants to issue notices of supplemental authority when there is a decision potentially relevant in another case.
“It’s part of the reality that much of the law here was fundamentally forged in the context of our lower courts,” Longo said. “That’s where the jurisprudence has developed. There hasn’t been a new regulation or statute. … I think it’s a symptom of the way the law has evolved here that, often, any lower court decision on Howey’s issue in the context of a cryptocurrency case is often cited in other courts with decisions on those types of issues before them.”
Without regulatory clarity from Congress, the cryptocurrency industry has no choice but to look to the legal system for answers, a process that Longo and other lawyers have pointed out is expensive and time-consuming.
“The courts are trying to solve the ‘Neuromancer’ problems at the pace of a bleak house,” Gottlieb quipped.
“The case concerns a [initial coin offering, or ICO] this happened in 2014. So, 10 years later, we are faced with some of these cases,” Gottlieb added. “We have problems today that we will still have to deal with in district courts five, ten years from now – and that doesn’t even count when we see the results of the appellate courts or the Supreme Court. “
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.