The Ripple Ruling calls for Crypto Legislation need a Clearer, more Comprehensive, and Fairer regulatory framework

On the morning of July 13, a 34-page ruling was released from New York. It is a ruling by a New York district court (Judge Analisa N. Torres) on a lawsuit by U.S. regulators regarding the cryptocurrency Ripple (XRP). The lawsuit alleges that XRP is not a security if it is sold to retail investors through an exchange or algorithm, and that the direct sale of XRP to institutional investors violated securities laws.

The case began in December 2020 when the U.S. Securities and Exchange Commission (SEC) accused Ripple Labs and two executives, CEO Bradley Garlinghouse and co-founder Christian Larsen, of conducting a $1.3 billion public offering of XRP without registering it as a security. The SEC argued that XRP should be classified as a security and subject to the same regulations as other securities, while Ripple countered that XRP is a digital currency, not a security, and that the SEC failed to provide fair notice that XRP could be considered a security and was arbitrarily interpreting XRP differently than Bitcoin and Ethereum.

In the ever-evolving world of cryptocurrencies, this case has brought to the forefront the complexities and challenges of regulation for nearly three years. The court interpreted the case under the Howey Test and ruled that XRP was considered a security in the context of a solicitation of institutional investors, but not otherwise. The subtest is a standard established by the U.S. Supreme Court in 1946 to determine whether a particular transaction constitutes an investment contract (a type of security).

In an immediate and positive reaction to the ruling, the value of XRP jumped more than 80%, with a ripple effect across other altcoins, including Matic, Litecoin, and Solana, which all gained around 20%. Bitcoin (BTC) and Ethereum (ETH) contrasted with gains of less than 5%.

The Ripple ruling marks a major turning point for the crypto space, as it marks the first of several cases in which regulators have lost against crypto-related organizations. For starters, the crypto industry is optimistic that the ruling is a major victory and will serve as a touchstone for all future crypto-related regulations. The ruling is likely to be used as a legal precedent for other ongoing and future crypto-related cases, especially those involving securities laws.

In addition, the growing number of exchanges trading XRP and other altcoins will attract more investors to the crypto market, increasing volatility along with profitability. On the other hand, while the SEC scored a partial victory with this ruling, it is likely to revisit its approach to cryptocurrency regulation in general as it faces new challenges.

The most important takeaway from the Ripple case, however, is that the cryptocurrency was effectively shackled to securities under strict regulatory oversight while the SEC pursued the case for nearly three years. As Hobbes argued, “where there is no law, there is no liberty,” and in the absence of proper legislation, regulators can infringe on the rights of cryptocurrency companies to exercise their rights and freedoms at any time. If Congress neglects to legislate and fails to come up with a clear and sufficient statute, the courts will step in, and judges’ decisions can be reversed, causing further disruption to the industry. This is because the role of judges under the Constitution is to interpret the law, not make it.

Current cryptocurrency regulation (CryptoReg) is largely designed for traditional securities and is often ill-suited to the unique characteristics of cryptocurrencies. Therefore, if current statutes are not adequate to address the potential promise and pitfalls of cryptocurrencies, Congress should urgently act to ensure that we have a clearer, more comprehensive, and fairer regulatory framework.

Clear and comprehensive legislation regarding cryptocurrencies will provide the certainty and stability needed for this innovative sector to thrive, while protecting consumers and preventing abuse. Now is the time to provide a consistent set of tools under which cryptocurrencies operate, defining rights and responsibilities, prescribing procedures for resolving disputes, and establishing mechanisms to enforce the rules.