Ripple did not achieve a decisive victory, nor did the crypto community.
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Ripple did not achieve a decisive victory, nor did the crypto community.
Detailed explanation of why XRP has no reason to脱离 securities risks in the crypto market.
Navigating Web3 tides with focused insightsBy Elponcho
Too Long; Didn't Read (TL;DR)
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The court determined whether XRP qualifies as a security based on the circumstances of its sale, not on whether XRP itself has characteristics of a commodity or currency;
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The SEC sued Ripple Labs, Bradley Garlinghouse, and Christian A. Larsen for violating Section 5 of the Securities Act through unregistered securities offerings. Summary judgment motions were partially granted and partially denied;
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According to court documents dated July 13, 2023, only institutional sales constituted investment contracts and involved illegal offers and sales of unregistered securities;
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Programmatic sales conducted by Ripple Labs via exchanges were not found to meet the definition of an investment contract;
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Ripple did not achieve a complete victory, nor did the crypto industry, because most token issuers engage in institutional sales and profit-oriented marketing similar to Ripple's practices.
Why Did the SEC Sue Ripple? Unregistered Offerings and Sales of Securities
The SEC argued that defendants Ripple Labs, co-founder Christian A. Larsen, and Ripple CEO Bradley Garlinghouse failed to file registration statements for any offering or sale of XRP.
Ripple also did not submit financial statements or other periodic reports to the SEC, nor did it file any information regarding Ripple or XRP with EDGAR (the SEC’s electronic database), such as Form 10-Q (quarterly financial report), Form 10-K (annual financial report), or Form 8-K (report of material corporate events).
The SEC accused Ripple of conducting unregistered XRP transactions from 2013 to 2020 totaling over $2 billion. This lawsuit, initiated on December 22, 2020, remains ongoing.
What Determines Whether Something Is a Security? How Was XRP Sold?
In the July 13, 2023 ruling by the U.S. District Court for the Southern District of New York, the judge categorized the conduct alleged by the SEC into four types, concluding that only the first type — “institutional sales” — involved unregistered offers and sales of securities.
Notably, the court emphasized that the determination of whether XRP is a security does not depend on the intrinsic nature of XRP itself, but rather on the overall circumstances of how it was offered and sold.
This aligns with the Howey Test—the standard used to determine whether an instrument constitutes an investment contract—which focuses on real-world transaction contexts. Even if XRP possesses certain features of a commodity or currency, it may still be offered or sold as an investment contract.
Below are the four categories of XRP distribution and sale activities identified by the court:
1. Institutional Sales
Ripple directly sold XRP through its wholly-owned subsidiaries to specific parties, primarily institutional buyers, hedge funds, and ODL clients.
The SEC alleges that Ripple sold approximately $728.9 million worth of XRP through these institutional sales.
2. Programmatic Sales
Ripple systematically sold XRP on digital asset exchanges, often using trading algorithms. These sales occurred in a “no-knowledge-of-counterparty” context—meaning Ripple did not know who was buying, and buyers did not know who was selling.
The SEC alleges that Ripple sold approximately $757.6 million worth of XRP through programmatic sales.
3. Other Distributions: Service Payments, etc.
Ripple distributed XRP as payment for services—for example, compensating employees with XRP or distributing XRP under its “Xpring Initiative” to fund third-party developers building applications related to XRP and the XRP Ledger.
The SEC claims Ripple received $609 million in value through these service-based distributions.
4. Individual Sales by Company Executives
Ripple co-founder Christian A. Larsen and CEO Bradley Garlinghouse personally offered and sold XRP.
The SEC alleges that Larsen profited at least $450 million from programmatic sales on exchanges, while Garlinghouse earned about $150 million from similar exchange sales and also received XRP as compensation.
Reasoning Behind Whether XRP Sales Constitute Securities
Institutional Sales of XRP Qualify as Securities (◎)
The court found that Ripple’s institutional sales—where entities exchanged fiat or other currencies for XRP—satisfy the first prong of the Howey Test: “investment of money.”
Furthermore, although Ripple held proceeds from institutional sales in accounts under different subsidiaries, the funds were effectively controlled and used by Ripple. Ripple used these funds to promote and increase the value of XRP, develop applications on the XRP Ledger, and support the XRP market—demonstrating “horizontal commonality,” where investors pool assets and share profits and risks collectively. This satisfies the second Howey prong: “investment in a common enterprise.”
The third Howey element—“expectation of profit”—was also met. Based on Ripple’s communications and marketing activities, a reasonable investor would understand that Ripple intended to use capital raised from institutional sales to enhance the XRP ecosystem and increase XRP’s value.
The judge cited numerous examples from Ripple’s past public statements influencing price expectations. For instance, Ripple CEO Garlinghouse stated: “For Ripple to do well, we have to do very well protecting the value of XRP and the network value,” urging potential investors to give Ripple “time” to “maximize value for the protocol.” Such executive statements led the court to conclude that institutional buyers recognized XRP’s speculative value.
Additionally, the court noted contractual provisions in institutional sales supporting their investment nature—for example, lock-up periods or resale restrictions tied to XRP trading volume. The judge reasoned that if XRP were merely a medium of exchange, rational economic actors would not agree to lock up millions of dollars. Thus, institutional sales clearly violated Section 5 of the U.S. Securities Act through unregistered securities offerings.
Programmatic Sales of XRP Do Not Qualify as Securities (×)
The court determined that in programmatic sales, even though Ripple knew buyers viewed XRP speculatively and aimed to boost trading volume, these sales occurred without knowledge of the counterparty.
Although some buyers in programmatic sales may have expected profits tied to Ripple’s efforts, they could not attribute those gains to Ripple’s actions since they did not know they were purchasing XRP from Ripple. Therefore, this fails the third Howey prong: “expectation of profit derived from the efforts of others.”
Moreover, unlike institutional sales, programmatic sales lacked lock-ups or resale restrictions. Ripple’s promotional materials were not broadly disseminated to the general public. The court also observed that programmatic sale buyers were generally less sophisticated than institutional investors and had different levels of information access and profit expectations.
Other Types of XRP Distributions Do Not Qualify as Securities (×)
The court rejected the SEC’s claims regarding other forms of XRP distribution. While the SEC alleged Ripple funded its operations by transferring XRP to third parties who then sold it on public markets, the court found no concrete evidence that these third parties paid Ripple money or provided any measurable consideration in return.
Thus, this fails the first Howey requirement: “investment of money.”
Individual Sales by Executives Do Not Qualify as Securities (×)
While Section 4(a)(1) of the Securities Act exempts transactions “by any person other than an issuer, underwriter, or dealer” from registration requirements, the SEC argued that co-founder Christian A. Larsen and CEO Bradley Garlinghouse qualified as “affiliates” of Ripple and thus were not exempt.
However, the judge concluded this issue need not be resolved because, like programmatic sales, these executive sales occurred anonymously on exchanges. Since buyers did not know they were purchasing from Ripple executives, the expectation of profit based on Ripple’s efforts could not be established—failing the third Howey prong.
Ripple Did Not Win Completely—Nor Did the Crypto Industry
First, Ripple Labs did not win outright. The court’s decision only partially granted and partially denied motions for summary judgment filed by both the SEC and the defendants. Further proceedings will continue.
Only Ripple’s institutional sales were deemed to involve unregistered securities. Other activities were not classified as such because they occurred on secondary exchange markets or lacked direct links to investment returns. Nevertheless, Ripple must still face penalties related to its institutional sales.
Most Cryptocurrencies Have Institutional Investment Agreements
The court found that Ripple’s institutional sales—including contractual terms and information shared—clearly satisfied all elements of the Howey Test and indeed constituted unregistered securities offerings. Today, most cryptocurrency startups involve early institutional participation, with contractual arrangements and promotional statements comparable to or exceeding those of Ripple Labs. If such sales involve U.S. persons, the SEC’s enforcement actions are now effectively pre-validated by this ruling.
In this opinion, the judge repeatedly referenced the Telegram fundraising case as an analogous example. That case ultimately settled, requiring Telegram to pay an $18.5 million fine and notify the SEC before issuing any tokens for three years.
Good News! Selling Tokens via Exchanges May Be Safe?
The court ruled that Ripple’s programmatic sales—conducted anonymously between buyers and sellers—do not satisfy the Howey Test’s “expectation of profit” criterion. This reduces regulatory risk for crypto issuers selling tokens on secondary markets.
Bad News! Ripple’s Attempt to Narrow the Howey Test Fails
Beyond the broad interpretive scope of the four Howey factors, Ripple Labs attempted to introduce stricter criteria for defining investment contracts, which it called the “Essential Ingredients Test.” Unfortunately, the court rejected this framework.
The “Essential Ingredients Test” included three conditions:
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A contract between promoters and investors establishing investors’ rights;
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The contract imposes a duty on the promoter to take specific actions post-sale for the benefit of investors;
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Investors have a right to share in profits generated by the promoter’s use of investor funds.
Conclusion: The Crypto Industry Has Not Evaded the SEC’s Reach
Looking back at the SEC’s complaint against Binance, TechFlow’s analysis of the securities allegations against multiple tokens revealed detailed documentation of marketing materials, profit expectations, and evidence of investment relationships—including several cases involving institutional token offerings. If Ripple’s institutional sales are confirmed as unregistered securities, many other tokens may face similar liability.
Glossary: Key Terms in the XRP Case
ODL
On-Demand Liquidity—a feature of RippleNet that uses XRP as an intermediary asset to facilitate cross-border payments between different fiat currencies. ODL leverages Ripple’s distributed ledger and XRP.
Howey Test
Whether a financial product constitutes an “investment contract” (a type of security) is determined by the “Howey Test,” established in the 1946 SEC v. W.J. Howey Co. case. It consists of four criteria:
- Investment of money
- Invested in a common enterprise
- Expectation of profit
- Profit derived solely from the efforts of the promoter or a third party
Section 5 of the U.S. Securities Act of 1933
Under Section 5 of the Securities Act, all issuers must register non-exempt securities with the Securities and Exchange Commission (SEC).
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