Ripple: XRP a Commodity, Not a Security, After Ruling

A federal court in New York ruled in July 2023 that programmatic sales of XRP on public exchanges did not meet the legal definition of a securities offering, while some direct sales to institutional buyers did. Ripple said the ruling confirms XRP acts as a digital commodity when sold on exchanges.

U.S. District Judge Analisa Torres applied the Howey test, a four-part standard used to determine whether a transaction is an investment contract. The judge found routine exchange trades lacked elements that would make them securities because purchasers did not reasonably expect profits based on Ripple’s efforts. For certain private institutional sales, the court found evidence that buyers reasonably expected profits tied to Ripple’s promotion and business activities.

The Securities and Exchange Commission filed its lawsuit against Ripple in December 2020, alleging the company raised more than $1.3 billion through unregistered sales of XRP. The case focused on whether offers and sales of XRP qualified as investment contracts that must be registered under federal securities laws.

XRP’s market price rose after the ruling and several cryptocurrency trading platforms cited the court’s findings when deciding how to list or relist XRP for retail customers.

Both parties indicated they would seek further review in higher courts. The SEC said it disagreed with portions of the decision and planned to appeal. Ripple stated it would continue to defend XRP’s classification and pursue court clarification.

Legal analysts noted the court’s distinction between public market trades and private institutional sales could influence future litigation and regulatory guidance, because the same token may be treated differently depending on how and to whom it is sold.

In a statement Ripple wrote, “We believe the court’s decision confirms that XRP, when sold on public exchanges, behaves like a commodity and not a security,” and added the company would continue to press for a full legal resolution that settles regulatory uncertainty.