A comment on SEC v. Ripple

SEC v. Ripple1, a significant judgment favouring Cryptocurrencies, has been analysed in this article.

In a major win for the Crypto platforms, Judge Analisa Torres of the United States District Court (SDNY) held that certain issuances of XRP by Ripple, a Cryptocurrency exchange, did not violate investor protection laws.

XRP is a cryptocurrency and token Ripple Labs uses to facilitate transactions on its network. XRP primarily enhances global financial transfers and the exchange of several currencies.2

Brief Background of the case:

The SEC initiated proceedings against Ripple and two of its executives, Larsen and Garlinghouse, alleging that Ripple’s tokens amounting to nearly USD 1.5 billion XRP was a violation of Securities laws, more specifically section 5 of Securities Act.

The SEC’s claims revolved around three main points, asserting that Ripple carried out three categories of unregistered XRP sales.

The SECs three primary concerns were that:

  1. Ripple engaged in unregistered XRP sales through institutional sales under documented contracts, resulting in a total of $728 million.
  2. Ripple further executed Programmatic Sales on Digital Asset Exchanges, generating $757 million.
  3. Ripple also carried out other distributions under written contracts, receiving $609 million in non-cash consideration.

Howey’s test and its implications on the case:

Howey’s test originates from the landmark U.S Supreme court case which sets the standards for identifying whether a transaction qualifies as an investment contract, consequently falling under the classification of ‘security’ as per U.S. federal securities laws.

The case lays down three essential components that are necessary to establish an investment contract:

  1. Investment of money: The first criteria entails demonstrating that the investors have invested money, capital or assets in a common enterprise.
  2. Expectations of profits: Secondly, the investor must have a reasonable expectation of obtaining profits from their investment.
  3. Common enterprise: Lastly, the investment must be part of a common enterprise, where the success of investors is tied to the overall success or failure of the enterprise.

Basis these criteria the Supreme Court examined whether the XRP sales in question qualified as security issuances.

Court’s Analysis:

  1. Institutional Sales: The Court examined the “economic reality and totality of circumstances” in which Ripple conducted its Institutional Sales. Consequently, it concluded that Ripple’s XRP Institutional Sales constituted an unregistered offer and sale of investment contracts, which infringed upon laws safeguarding investors. The court noted that Ripple presented XRP to institutional buyers as an investment rather than for consumptive use implying a speculative investment potential of XRP. This could have led the Institutional Buyers to think that Ripple was pitching a speculative value proposition for XRP with potential profits that could be derived from Ripple’s entrepreneurial and managerial efforts.
  2. Tokens distributed to the public through digital asset exchanges: The court further outlined the distinction between the institutional sales and the programmatic and other sales. In contrast to Institutional Sales, where the Issuer was known, the buyers on Digital Exchanges did not know the identity of the Seller/ Issuer. The Court observed that sales on Digital Asset Exchanges lacked other factors present in the economic reality of Institutional Sales. For instance, the tokens distributed through Digital Asset Exchanges were not made pursuant to contracts containing any indemnification clauses, lockup provisions or resale restrictions.


Taking the above into consideration, in addition to the inability to satisfy Howey’s criteria, the Court granted partial relief to Ripple.

Ripple’s two motions were granted. At the same time, a motion by the Securities and Exchange Commission (SEC) alleging Ripple violated the applicable law by engaging in institutional sales was granted.

Critical examination:

This case is a major win for the crypto platforms. While, Ripple came out unscathed for half of its issuances, the issuance to Investors was considered to be violating Securities laws. Considering the size and scale of Crypto investments, it is quite surprising why Legislatures are still trying to extend age-old securities laws to Cryptocurrency instead of drafting new laws/amending existing ones altogether.

Takeaways for India:

Currently, in India, cryptocurrencies operate within a regulatory grey area. The legal landscape remains uncertain and cryptocurrencies remain unregulated. This case along with the application of Howey’s test can offer some general insights to Indian legislators.

  1. Regulatory status:  This case highlights the importance of clarifying the regulatory status of crypto currencies under existing security laws. This should prompt the regulators in India to provide clear guidelines pertaining to cryptocurrencies.
  2. Defining securities: Indian legislators must create well defined criteria to determine whether a cryptocurrency should be classified as a security. This could help avoid any potential ambiguity.
  3. Global Influence: This case and similar developments might influence India’s approach to cryptocurrency regulations. Which could in turn enhance India’s participation in the global cryptocurrency ecosystem.


The content of this article is intended to provide general guidance on the subject matter. Specialist advice should be sought about your specific circumstances.


1 Securities and Exchange Commission v. Ripple Labs, Inc., Bradley Garlinghouse, and Christian A. Larsen [20 Civ. 10832 (AT)]

2 Ripple. https://ripple.com/faq/

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