Ripple's victory over SEC indicates that ADA is not a security

Published 14.7.2023

XRP is not a security and most operations by Ripple are not considered sales of investment contracts. This suggests that ADA is almost certainly not a security either. IOG and the Cardano Foundation did not do anything illegal regarding the initial distribution of ADA coins in Japan. Their current activities are also likely in accordance with the law.

How to understand Ripple's victory over the SEC

Ripple and its network is one of the most centralized solutions in the entire blockchain industry. XRP coins play no role in network consensus. It serves neither as a reward nor as an expensive resource around which it would be possible to decentralize the production of blocks or governance. Ripple sold XRP programmatically and issued quarterly reports about it.

In a long-running lawsuit with the SEC, the court ruled that XRP is not a security. More precisely, in most cases, it is not a security.

By court decision, we learn that the vast majority of individuals who purchased XRP from exchanges did not invest their money in Ripple at all. Ripple putting XRP on exchanges for trading and even funding their operation with those sales is not an investment contract, and therefore not a security. It indicates that sales of other similar tokens on exchanges are not trading with securities.

This is a huge win especially for centralized exchanges as they are not doing anything illegal when they sell cryptocurrencies. The SEC lawsuits against Binance and Coinbase are very likely to end in a victory for the centralized exchanges. In the case of Binance, it will be more complicated, as the SEC accuses the exchange of other offences against the law and not just the sale of cryptocurrencies.

Furthermore, we learn that even a programmatic sale of XRP by Ripple is not considered a sale of securities.

The court decided that institutional buyers knowingly purchased XRP directly from Ripple pursuant to a contract, but the economic reality is that a programmatic buyer stood in the same shoes as secondary market purchasers who did not know to whom or what it was paying their money. So, Ripple's programmatic sales of XRP did not constitute the offer and sale of investment contracts.

Put simply, sales of tokens (in this case, XRP) by executives are not considered sales of securities.

Other XRP distributions, e.g. to developers, to charities, to employees are not considered as distributions of securities. It includes many things like bounties, investments in others using XRP, grants using XRP, and transfers to execs in XRP. All of this is not considered as activities related to securities activity. In other words, Ripple directly paying people in XRP is not an investment contract and therefore XRP is not a security.

It can even be interpreted as cryptocurrencies being more money than securities. However, this was not explicitly stated in the judgment.

My understanding is that it is legal to pay people in cryptocurrency for the work they do for the protocol or the ecosystem. The reward can be paid directly by the company. In other words, the use of ADA coins in Catalyst is very likely legal including the IOG's control over the Treasury (which will soon change due to the entry of the Voltaire era).

Only in one case did the court rule against Ripple. The Court found that what constitutes an investment contract is past direct XRP sales to institutional clients. In other words, fundraising and sales of tokens to institutions is considered unregistered offer and sale of investment contracts.

There will be further court proceedings only on these institutional sales per the Court’s order.

Let's sum it up. The only activity that is considered a sale of securities is private sales to institutions. My understanding is that this also includes ICOs if institutional investors (VC funds) participated. All other activities with crypto are legal. Exchanges are allowed to sell crypto. Teams can use crypto as rewards and can even legally sell crypto to retail on a regular basis.

My understanding is that staking is legal coin distribution if you have your own wallet. I'm not sure if this also applies if your coins are staked through exchanges.

What does this mean for ADA?

Let us remind you that the initial sale of SADA coins took place via vouchers only in Japan according to the legal framework of that jurisdiction. Institutional investors were deliberately left out of the sale. From my layman's point of view, the American legal system has nothing to sue on this.

I dare say that for Cardano, Ripple's victory is very positive news since ADA will almost certainly not be considered a security. All activities of IOG and Cardano Foundation are very likely legal.

If XRP is not considered a security, I don't know what else in the blockchain industry could be considered a security. Of course, we are only talking about native coins of blockchain protocols (ADA, BTC, ETH, SOL, MATIC, etc.). From my point of view, the judgment of the court does not apply to the tokens of DeFi projects (DEXs, lending platforms, etc.). If these projects sold coins to institutional investors during the ICO/fundraising, it may be an unregistered securities offering.

The great news is that exchanges are allowed to trade with ADA and other coins. I expect to see ADA relisting by those exchanges that decided to delist the coins due to the SEC lawsuits against Coinbase and Binance. It may not happen right away, but in theory, the exchanges are not doing anything against the law and basically, no one directly ordered them to delist the coins that appeared in the lawsuits. If the exchanges do not trade in the coins of popular projects, they lose their profit.

Let's add that Kraken and Coinbase have already stated that they will relist XRP.

People were afraid that if trading or even using cryptocurrencies were banned in the US, the market would lose customers from the rich country where cryptocurrencies are popular. These concerns are now hopefully allayed.

The SEC's enforcement strategy has suffered a major setback. Court ruling on Ripple undermines SEC authority and the credibility of SEC Chairman Gary Gensler will certainly be greatly shaken.

The SEC's loss in the lawsuit against Ripple will bring new arguments to the debate about how to approach the regulation of cryptocurrencies in the US. This is good news for innovation in the financial sector. It would be illogical for regulators to favour several projects (or even just one) and try to destroy others.

Thanks to everyone who tirelessly participated in Ripple's victory over the SEC for several years. A lot of time and money was invested. The judge assured everyone in the blockchain industry that it makes sense in fighting the SEC and that it is possible to win. This is positive for all projects and everyone should be grateful.


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