Ripple’s $125 million fine brings little clarity to crypto

A federal court in Manhattan ordered Ripple to pay a $125 million fine for selling unregistered securities to institutional investors. Wednesday’s ruling is a fraction of the $2 billion the Securities and Exchange Commission asked for in the lawsuit it brought against the crypto company in 2020.  

Unless the SEC appeals, the ruling closes out the much-watched court case. But it leaves unanswered the many questions about whether cryptocurrencies are securities and which types of cryptocurrency activities are considered legal.

The case is relevant to the financial services industry because in its early days, several banks signed up to partner with Ripple, piloted its cross-border payment software and intended to use XRP as a mechanism to transfer payments to banks in other countries without having to go through the Swift network and maintain balances at “de nostro” accounts at those counterparties. Those banks have all quietly disengaged from Ripple. 

In its 2020 complaint, the SEC said Ripple and its executives had sold 14.6 billion units of XRP for more than $1.38 billion to fund the company’s operations and acquire personal wealth without registering their sales of XRP with the SEC. The SEC sought to permanently ban Ripple and its leaders from selling unregistered XRP tokens, to make the defendants “disgorge all ill-gotten gains” from the transactions and pay unspecified civil money penalties.

In a ruling on the case last year, Judge Analisa Torres said Ripple’s sales of its XRP token to institutional investors constituted a security investment contract — a win for the SEC and the reason for the $125 million fine. But the judge also said that when ordinary investors buy XRP on the secondary market through crypto exchanges, that trading activity does not constitute security trading. 

In her statement, Torres said Ripple cannot issue any more XRP without registering it with the SEC. However, there’s a lot of XRP out there. Ripple’s founders initially created 100 billion XRP, some of which they gifted to themselves and to the company, and some of which they offer for sale on a monthly basis. 

“If they want to go to the market and raise and sell more XRP to investors, they would have to register with the SEC, but it doesn’t seem like they’re going to do that anymore,” said Robert Le, crypto analyst at Pitchbook. 

In a post on X, formerly Twitter, Ripple CEO Brad Garlinghouse positioned the judge’s decision as a win for his company. “The SEC asked for $2B, and the Court reduced their demand by ~94% recognizing that they had overplayed their hand,” he wrote. “We respect the Court’s decision and have clarity to continue growing our company. This is a victory for Ripple, the industry and the rule of law. The SEC’s headwinds against the whole of the XRP community are gone.”

But the SEC also felt it won. A spokeswoman noted the court granted the SEC’s motion for remedies including an injunction barring Ripple from committing additional violations of securities laws. The fine was more than 12 times the amount Ripple suggested. 

“The court also addressed the egregiousness of Ripple’s conduct and noted that there is no question that the recurrent, highly lucrative violation of Section 5 is a serious offense,” the spokeswoman said Thursday. “As court after court has stated, the securities laws apply when firms offer and sell investment contracts, regardless of the technology or labels that they use.”

Other judges have interpreted the rules differently than Torres has, Le said.

“It’s not unanimous and we won’t know until it goes up to the higher courts – the appellate courts or even the Supreme Court,” he said. “That’s when we’ll get the ultimate decision of what the real view is on secondary trading of crypto assets, whether they’re securities or not.”

So the final decision in this case does not bring clarity to the crypto world. 

“If anything, it adds more confusion,” Le said.