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A U.S. judge’s ruling helped buoy the cryptocurrency sector on Thursday, especially alt-coins such as solana (SOL-USD), cardano (ADA-USD), and litecoin (LTC-USD). The ruling found that Ripple Labs’ crypto asset XRP (XRP-USD) can be considered a security in some cases and not a security in others.
Whether an asset is considered a security is important, because that would decide whether the Securities and Exchange Commmision has the authority to regulate the trading of the assets. And that means the exchange and the entity issuing the security would be subject to a raft of regulations.
In December 2020, the SEC sued Ripple Labs and two senior executives, alleging that Ripple is a security. As such, when selling the XRP, Ripple would have to register the offering with the SEC. In addition, the exchange on which the offering takes place would also have to register. In June 2023, the SEC also sued Coinbase Global (NASDAQ:COIN), alleging that it’s operating as an unregistered securities broker.
U.S. District Judge Analisa Torres said in her summary judgment that Institutional Sales of Ripple constitute the sale of unregistered securities. She pointed out the Ripple Labs’ marketing materials as backing up that view. That part of the lawsuit will not go to trial. But the judge gave no indication of penalty or fine in the judgment, Barclays analysts Ramsey El-Assal and Benjamin Budish said in a note to clients.
“The Court finds that reasonable investors, situated in the position of the Institutional Buyers, would have purchased XRP with the expectation that they would derive profits from Ripple’s efforts,” the judge wrote in her ruling.
To qualify as a security, Torres applied the Howey test, which the SEC has used to make its claims that many crypto assets are also securities. Under the Howey test for an investment contract, an asset must be an investment of money in a common enterprise with a reasonable expectation of profits made through the efforts of others, according to the SEC.
Programmatic sales, which are essentially secondary sales executed by individuals on exchanges, do not satisfy the definition of a security, the judge said, as the investor is not putting money into the “common enterprise.” That dispute will proceed to trial, the Barclays analysts said.
Also at issue are “other distributions”, which involved the use of XRP as payment to such parties as employees or vendors. Since the recipients of the assets didn’t invest money in them, they don’t qualify as securities, the Torres said. That part will also move to trial.
“Our read of [Thursday’s] ruling is that marketing and context matter — in other words, the way the token was sold to investors impacts whether or not it is a security,” said El-Assal and Budish.
Needham analyst John Todaro sees the ruling as a positive for Coinbase Global (COIN) “as it sets precedent that crypto token sales through exchanges, at least in the XRP case, did not violate securities laws. We believe this outcome should moderately de-risk the regulatory pressure on the stock.”
The ruling also gives him some optimism that Coinbase (COIN) will eventually benefit from bitcoin (BTC-USD) ETFs that are in the pipeline. “Additionally, recent bitcoin ETF applications from major financial institutions that are using Coinbase for various services gives us further comfort regarding broad support for the ecosystem and Coinbase,” he wrote.
Coinbase (COIN) stock climbed ~33% in the last week and doubled in the past month as major financial institutions filed applications for spot bitcoin (BTC-USD) ETFs. BTC, meanwhile, rose 3.9% for the week and 21% for the month.
Compass Point analyst Chase White agrees. “This ruling, at least in our view, removes any shadow of a doubt that ETH (ethereum) is a security while also being quite positive for altcoins, both seeing strength following the decision,” he wrote in a note to clients.
White sees not only gains for ether (ETH-USD) and the altcoins, but expects that a Grayscale/GBTC win agains the SEC “will be a catalyst for higher prices and ETF approvals and institutional adoption.” That, in turn, could lead to a supply shock due to the lack of bitcoin (BTC-USD) available to buy.
“With liquidity conditions remaining weak and the macro picture still uncertain, we wouldn’t be surprised to see crypto assets become more volatile in the short-term, but any moves to the downside should be viewed as a buying opportunity for crypto assets and crypto-related stocks,” White said in a note to clients.
