The Reasoning Behind the Decision that Sent Ripples Throughout the Cryptocurrency Market

By Jonathan Lu

The meteoric rise and subsequent fall of cryptocurrency values has shown that the legal landscape around cryptocurrency is still developing. XRP is a cryptocurrency developed by Ripple Labs in 2012 as an alternative to Bitcoin.[1] XRP has the fifth highest market capitalization out of all cryptocurrencies and is traded on major exchanges including Binance, BTCEX, and Deepcoin.[2]  XRP made headlines on December of 2020 when the Securities and Exchange Commission (SEC) sued Ripple for violating the Securities Act by selling XRP as an unregistered security.[3] On July 17th, 2023, Judge Analisa Torres in SEC v. Ripple Labs, Inc[4] held that the sale of XRP on public exchanges were not offers of securities.[5] However the court awarded the SEC a partial victory by finding that Ripple’s sale of $728 million of XRP directly to hedge funds did amount to the sale of unregistered securities.[6]

            Section 5 of the Securities Act states that it is unlawful to sell a security unless it is registered with the SEC.[7] The most important question in deciding this case was whether or not XRP is a security.[8] In 1946, the Supreme Court created the Howey Test to evaluate whether assets are subject to U.S. securities laws.[9] A security under the Howey Test is an investment of money in a common enterprise to be derived from the efforts of others.[10] Using the Howey Test, Judge Torres ruled that sales of XRP on public exchanges are not offers of securities because “purchasers did not have a reasonable expectation of profit tied to Ripple’s efforts”.[11] Retail purchasers of XRP on public exchanges do not know if they are buying XRP from Ripple or from other private sellers.[12] However, Judge Torres ruled that Ripple’s direct sales and marketing to institutional investors such as hedge funds did make it clear that such investors could depend on Ripple’s efforts to increase the value of XRP.[13]

            Proponents of cryptocurrencies celebrate SEC v. Ripple Labs, Inc as a victory, but the fight is not over yet.[14] On August 9th, 2023, the SEC filed an appeal.[15] If the 2nd Circuit reverses and rules in favor of the SEC, then the SEC will have its first precedential case law on how to apply the Howey Test to cryptocurrency.[16] In light of the SEC’s current actions against Coinbase and Binance, the 2nd Circuit’s decision will shape the legal landscape of cryptocurrency.[17]

[1] Tobi Amure, What is XRP?, Investopedia (Aug. 1, 2023),

[2] Id.

[3] Id.

[4] SEC v. Ripple Labs, Inc., 20 Civ. 10832 (AT), 2023 WL 4507900 at *8 (S.D.N.Y. July 13, 2023).

[5] Jody Godoy, Ripple Labs Notches Landmark Win in SEC Case over XRP Cryptocurrency, Reuters (July 13, 2023, 5:26 PM),

[6] Id.

[7] Ripple Labs, Inc., 2023 WL 4507900, at *5.

[8] Id.

[9] Nathan Reiff, Howey Test Definition: What It Means and Implications for Cryptocurrency, Investopedia (July 31, 2023),

[10] S.E.C. v. W.J. Howey Co., 328 U.S. 293, 299 (1946).

[11] Godoy, supra note 5.

[12] Id.

[13] Id.

[14] Peter Fox et al., Ripple v. SEC: Why the Crypto Industry may have Celebrated too Early, Fortune (Aug. 10, 2023, 6:28 AM),

[15] Nikhilesh De, SEC Will Appeal XRP Ruling in Case Against Ripple, Coindesk (Aug. 9, 2023, 5:33 PM),

[16] Fox, supra note 14.

[17] Id.