The SEC’s pursuit of crypto firms that allegedly sold unregistered securities sent a shockwave through the crypto community on July 13. XRP, Ripple Labs’ flagship cryptocurrency, was ruled not to be a security in a New York district court. This was in contrast to Bitcoin, which is classified as a commodity by the Commodities and Futures Trading Commission (CFTC).

Ripple Labs was charged by the SEC in 2020 for alleged unregistered security trading and raising over $1.3 billion over a seven-year period. The case focused on whether the sales of the coin constituted a security, and more precisely an “investment contract”. This raised the question: what is an investment contract? According to the Supreme Court, it is “a contract, transaction[,] or scheme whereby a person [(1)] invests his money [(2)] in a common enterprise and [(3)] is led to expect profits solely from the efforts of the promoter or a third party.”

Flavia Kenyon, a barrister, pointed out in an interview that the contention lies in points two and three, as the aims and roles of users are varied and profits from holding a coin are not usually generated by others. The ruling implies that the asset class of a coin is variable depending on how it is sold and to whom.

However, the ruling does not provide clarity on secondary market sales, which make up 99% of XRP transactions since 2017. Coinbase’s suit against the SEC may provide some answers, but the outcome of their case is needed. Furthermore, since the Ripple ruling was made in a district court, other district judges are free to rule against it. This has happened on August 1, when Judge Rakoff – of the same Southern District of New York court – denied a motion to dismiss from Terraform, another cryptocurrency provider.

The judgement gives the SEC a greater foothold in the regulation of crypto, with many more suits likely to be brought against crypto providers. Crypto is still relatively new and regulation is slow to change, meaning that until clear rules are set everyone suffers. Crypto-asset providers will fear retroactive lawsuits, federal agencies are forced to pursue companies, and investors in cryptocurrencies face instability, fraudulent offerings and asset losses. The early crypto years may be tamed, but it is likely to happen slowly with many casualties.