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In a ruling that could help shape the future of cryptocurrency regulation in the United States, US federal judge Analisa Torres has delivered a mixed verdict<\/a> in the case between the Securities and Exchange Commission (SEC) and San Francisco-based blockchain firm Ripple Labs. The lawsuit, which has been closely watched by the crypto industry, centered on whether Ripple’s XRP token constituted an unregistered security offering.<\/p>\n The court ruled that, while Ripple’s institutional sales of XRP did indeed constitute an unregistered securities offering, its sales of the token on exchanges did not. The decision \u2014 which comes after a three-year legal battle \u2014 could set a precedent for future token classification cases, and currently has the crypto market rally<\/a> in response. <\/p>\n The SEC had initially filed a lawsuit against Ripple Labs in December 2020, alleging that the company had raised $1.4 billion through an unregistered securities offering. The court granted part of the SEC’s motion relating to $728 million in institutional sales.<\/p>\n In its ruling, the court stated that \u201creasonable investors\u2026in the position of Institutional Buyers, would have purchased XRP with the expectation that they would derive profits from Ripple’s efforts.\u201d However, the court also ruled that \u201cXRP, as a digital token, is not in and of itself a ‘contract, transaction’.[,] or scheme’\u201d that embodies the requirements of an investment contract under the Howey test.<\/p>\n “Having considered the economic reality of the Programmatic Sales, the Court concludes that the undisputed record does not establish the third Howey prong,” the legal filing read. \u201cWhereas the Institutional Buyers reasonably expected that Ripple would use the capital it received from its sales to improve the XRP ecosystem and thereby increase the price of XRP [\u2026]Programmatic buyers could not reasonably expect the same.<\/p>\n The court’s decision also addressed Ripple’s “essential ingredient” defense, in which the company argued that a physical contract must exist to be considered an investment contract. The court ruled against this defense, stating that in each instance where Ripple offered or sold XRP as an investment contract, a contract did exist.<\/p>\n The ruling also touched on the roles of Ripple co-founder Chris Larsen and CEO Brad Garlinghouse. The judge concluded that \u201cBased on the disputed facts in the record, [\u2026] a reasonable juror could find that Larsen and Garlinghouse did not know or recklessly disregard Ripple’s Section 5 violations.\u201d <\/p>\n In response to the ruling, Garlinghouse tweeted, “We were on the right side of the law, and will be on the right side of history.”<\/p>\nA long time coming<\/h2>\n