On July 13, 2023, Judge Analisa Torres of the United States District Court for the Southern District of New York (SDNY) issued an order in SEC v. Ripple Labs, Inc., et al. (20-cv-10832-AT-SN (S.D.N.Y. 2020)), a case brought by the SEC against payment settlement system and currency exchange network Ripple Labs, Inc. and its senior leaders, Bradley Garlinghouse and Christian A. Larsen (collectively, Ripple), for conducting an unregistered offering and sale of crypto-asset securities in connection with issuance by Ripple Labs of the XRP token (XRP). The order grants in part and denies in part cross motions for summary judgment filed by Ripple and the SEC.

The SEC alleged in its complaint that Ripple sold over 14.6 billion units of XRP tokens worth over $1.38 billion from at least 2013 through 2020 without filing a registration statement, in violation of Sections 5(a) and 5(c) of the Securities Act of 1933, as amended (Securities Act). The SEC alleged that Ripple sold XRP as an investment contract, which is a security under the Securities Act (15 U.S.C. § 77b(a)(1)). The SEC's complaint indicated Ripple engaged in three categories of unregistered XRP offers and sales:

In its motion for summary judgment, Ripple Labs indicated XRP was not sold as an investment contract and consequently registration with the SEC was not required (see Practice Note, SEC Regulation of Digital Assets: SEC Approach to Digital Asset Regulation: Howey Test and FinHub Framework).

The court considered whether XRP was sold as an investment contract under the Howey test, developed by the US Supreme Court in SEC v. W.J. Howey Co. (328 U.S. 293 (1946)) to determine whether certain transactions constitute investment contracts. To be considered a security, the three prongs of the Howey test must be established. These are:

The SDNY held that under the Howey test:

Major crypto-asset exchange Coinbase restarted XRP trading on its platform following the Ripple Labs ruling. Since its re-listing, XRP surpassed bitcoin with nearly $25 billion in trading volume, which accounted for 21% of all crypto trading volume during that time.

The SDNY ruling in Ripple Labs on programmatic sales and other distributions stands in contrast to prior settlements and judgments in SEC enforcement actions for the unregistered sale of crypto-asset securities, including SEC actions against, among others:

Judge Torres' ruling is a watershed for the crypto and digital asset markets, and regulation of cryptoasset securities by the SEC, making a novel and important distinction between types of crypto-asset sales under the US securities laws.

SEC Chairman Gary Gensler, at a July 17, 2023 event at the National Press Club, indicated his disappointment with the ruling, specifically as it relates to retail investors. However, many crypto market participants have indicated the ruling is a victory not only for Ripple Labs, but for the crypto industry more broadly because the reasoning behind the ruling that sales of XRP to retail investors on crypto platforms do not constitute investment contracts, and are therefore not securities, can be applied to other digital assets that are the subject of SEC enforcement action or litigation.

For more information on SEC enforcement actions relating to digital assets, see Practice Note, SEC Regulation of Digital Assets.

Update: On August 9, 2023, the SEC sent a letter to Judge Torres indicating the SEC's intention to file a 28 U.S.C. § 1292(b) motion for leave to file an interlocutory appeal of the Ripple Labs ruling regarding programmatic offers and sales to XRP buyers over crypto-asset trading platforms and Ripple's other distributions in exchange for labor and services. The motion also sought to stay the district court proceedings, including the scheduling order, during the pendency of the SEC's motion and potential appeal. However, on October 3, 2023, Judge Torres issued an order denying the SEC's motion for interlocutory appeal, reasoning that an appeal would not materially advance the case toward a conclusion.