Ripple’s Big Court Win Nonetheless Muddied Waters on Whether XRP Is a Security

Ripple recently scored an unequivocal victory from a dollars-and-cents standpoint in a class action securities lawsuit, with the judge tossing out most of the case.

But the judge also muddied the waters on a bigger issue, diverging from a high-profile decision last year by hinting that Ripple’s XRP might be a security – thus deserving closer regulation. The conflicting rulings from two judges – one calling XRP a security, one saying it’s mostly not – are a symptom of a bigger problem: the lack of legal and regulatory clarity for the crypto industry in the U.S. Until that clarity is granted, either by Congress or a ruling from a higher court, there will likely be more confusion for projects like Ripple and beyond.

On June 20, Judge Phyllis Hamilton of the U.S. District Court for the Northern District of California tossed out most of a class action suit Ripple faced. She allowed only one individual state law claim against the crypto firm and its CEO Brad Garlinghouse to proceed to trial.

The remaining claim – that, during a 2017 interview, Garlinghouse made “misleading statements” in connection with the sale of the XRP token, which the plaintiffs say were securities – is only worth $174, small potatoes for a firm estimated to be worth $11 billion.

That outcome is objectively a huge win for Ripple, something celebrated by the company. The two certified classes in the suit included all investors who purchased XRP over a six-year period and either held it or sold it at a loss. In throwing out all the class action claims, the California judge overseeing the case shielded Ripple from potentially paying enormous damages.

But there was the fly in the ointment: in her ruling, Hamilton suggested that XRP might, in fact, be a security – breaking with the opinion of District Judge Analisa Torres of New York’s Southern District, who ruled last year in a separate case brought by the U.S. Securities and Exchange Commission that XRP was only a security when sold to institutional investors.

Torres’ ruling was widely celebrated as a step toward regulatory clarity for the crypto industry, as well as a potential precedent for other crypto securities cases. Hamilton’s ruling doesn’t undo Torres’ ruling – as Ripple executives have pointed out – but she’s the second district judge to more or less disagree with Torres’ assessment of XRP.

In disagreeing with Torres, Hamilton potentially provided ammunition in the form of another alternative precedent for those who believe XRP – and other cryptocurrencies – are securities, crypto lawyers say.

If this all sounds confusing, that’s because it is – even to crypto lawyers.

Hamilton’s decision to toss out the class action claims was based on statute of limitations grounds, and had nothing to do with whether or not Hamilton thinks XRP might be a security.

“The court found that some of those claims were time-barred and others failed to raise a triable issue,” Joseph Castelluccio, a partner at international law firm Mayer Brown and co-leader of the firm’s fintech and blockchain practice groups, said in an email. “In other words, the Ripple-favorable rulings were not based on the view that XRP is not a security, which has been the central argument made by Ripple and two of its executives in the ongoing cases.”

For the single claim she allowed to proceed to trial, Hamilton applied the Howey Test – a pillar of U.S. regulation based on a Supreme Court ruling, used to determine if an asset is a security or not – to XRP and found that it failed on the third prong, writing: “The [court] cannot find as a matter of law that Ripple’s conduct would not have led a reasonable investor to have an expectation of profit due to the efforts of others.”

What this means, according to crypto lawyers, is that we still don’t definitively know whether XRP is a security or not.

“In sum, the door is not shut on the question of whether XRP may have the status of a security, at least in relation to this ancillary cause of action,” explained Moish Peltz, a partner at New York law firm Falcon, Rappaport and Berkman.

Ripple executives have said that Hamilton’s ruling doesn’t undo Torres’ 2023 ruling that XRP is not a security under federal law.

“In the SEC’s case, Judge Torres’ ruled that under federal law XRP is not in and of itself a security,” Ripple Chief Legal Officer Stu Alderoty said in an emailed statement. “That ruling stands undisturbed and cannot now be challenged in Judge Hamilton’s courtroom.”

It’s true that Hamilton’s ruling does not, in and of itself, challenge Torres’ ruling – though the SEC is likely to appeal its case against Ripple, and could potentially use Hamilton’s ruling as alternative precedent. Hamilton is not the…