Ripple has won a small victory in its battle with the U.S. Securities and Exchange Commission. The court decision brought some regulatory clarity to the cryptocurrency industry.

The U.S. District Court of the Southern District of New York ruled on Thursday that the sale of Ripple XRP tokens through exchanges and algorithms does not constitute an investment contract. The court said that the sale of tokens by institutions did not violate federal securities laws.

XRP surged on the news and cryptocurrency exchange Gemini announced that it may now list the token. However, early readings by legal experts suggest that the ruling does not settle the question as to whether or under what circumstances a virtual asset is a security according to U.S. laws.

The SEC, under Chairman Gary Gensler has argued that most do. They require issuers and exchanges alike to go through an expensive and lengthy registration process in order to sell securities to the public. The industry maintains that laws from the analog age do not apply to an asset type born on the Internet.

In an order that partially granted a summary judgment motion in the landmark U.S. SEC lawsuit against the blockchain platform, the court published its conclusions. In 2020, the regulator filed suit against Garlinghouse and Larsen for failing to register XRP before selling $1.3 billion of tokens.

The ruling

The order of the U.S. Court for Southern District of New York states that Ripple sold around $728.9 millions worth of XRP to hedge funds, institutional buyers and other parties. The order stated that these “institutional sales”, which were unregistered offers and sales of investment contracts, violated federal securities laws. It found that investors purchased XRP in the hope of profiting from Rippleā€™s work.

The order stated that Ripple had used the money it received from institutional purchases to “promote XRP’s value by developing new uses for XRP, and protect the XRP Trading Market.”

The court granted the SEC’s summary judgment motion as it relates to the institution sale. Otherwise, the court denied the motion.

The SEC could not definitively state that speculative investors expected to profit from the efforts of entrepreneurs or managers.

The order stated that “there is no evidence” that a reasonable buyer of Ripple, who would be a less sophisticated investor, could understand and parse the many documents and statements highlighted by the SEC, including statements (sometimes inconsistencies) made across social media platforms and on news sites, from various Ripple speakers with different levels of authority over an eight-year period.

The order stated that the sale of XRP by Garlinghouse and Larsen, as well as other distributions, falls under this category. Ripple was granted its motion for summary judgement in lieu of “programmatic” sales, other distributions and Larsen and Garlinghouse sales.

The court denied a second motion for summary judgement by the SEC on a “aiding and abetting” claim against the two executives, stating that it was “not clear whether Larsen and Garlinghouse knowingly or recklessly disregarded the fact that securities laws applied to XRP, and not laws under other regulatory regimes.”

“We said Dec. 2020 that were on the correct side of law and history. Garlinghouse , who tweeted after the order, expressed gratitude to all those who contributed to the decision. “Thankful to everyone for helping us reach today’s ruling – a landmark one that will affect crypto innovation in the U.S.

UPDATE: Added details throughout the article.

Update (July 13, 15,17 UTC) clarifies the “other distributions” that are referred to in the order. ”

UPDATE: July 13, 17:55 (UTC): Clarifies jurisdiction and adds context.

Aoyon A. Ashraf, Marc Hochstein.