2017 Haunts Ripple CEO: Is XRP A Security?

Ripple, the blockchain company at the heart of the XRP cryptocurrency, is embroiled in a new legal battle after a federal court approved a private securities lawsuit filed against the company by its CEO for violating California securities law. The ruling effectively dashes Ripple’s hopes for a swift resolution to its ongoing battle with the SEC.

By order Dated On June 20, Judge Phyllis Hamilton of the United States District Court for the Northern District of California announced that a jury would decide whether Ripple CEO Brad Garlinghouse made “misleading statements” to Canada’s BNN Bloomberg in 2017. In that interview, Garlinghouse claimed to be “very, very long” on XRP.

The lawsuit could prove embarrassing for the company, as it alleges that top executives “sold millions of XRP throughout the year.” A California court has dismissed all class action claims against the company and granted a stay, but individual state law claims will proceed to trial, Ripple Chief Legal Officer Stuart Aldeloti confirmed.

2017 Haunts Ripple CEO: Is XRP A Security?

Additionally, Judge Hamilton rejected Ripple’s defense and dismissed claims related to its sales of XRP to retail investors, arguments that previously led to a landmark ruling by Judge Analisa Torres in July 2023. However, Judge Hamilton found that XRP could be considered a security when sold to non-institutional investors who expected to benefit from Ripple’s efforts to promote cryptocurrencies.

Ripple’s battle continues

Hamilton’s order emphasized that reasonable investors may base their profit expectations not solely on general market trends, but on the companies’ actions to enhance the utility of XRP for cross-border payments and other uses. This important interpretation is consistent with the metrics used in the Howey test to determine whether a transaction qualifies as an investment contract.

The court rejected the legal argument that reasonable investors would have expected to benefit from general cryptocurrency market trends, as opposed to Ripple’s efforts to promote the use of XRP in international payments.

Ripple has been fighting a long and hard-fought battle with regulators ever since the SEC accused the company of offering XRP as an unregistered security in 2020. Courts have ruled that XRP itself is not a security, but that its offering to institutional investors violates federal law. Recent legal developments, however, indicate that the company’s regulatory battles are not over yet.

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