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Abstract

The Southern District of New York’s July 2023 decision in SEC v. Ripple Labs, Inc. has been touted as a monumental win for cryptocurrency purchasers and related businesses. The Ripple court held that, except institutional investor transactions, all sales of Ripple’s XRP token were not investment contracts, a class of security subject to federal securities law. The court’s ruling meant that Ripple could not be held liable for the unregistered trading of XRP beyond its sales to institutional investors. Ripple adds new insights to a pervasive policymaking dilemma addressed in this Note: is the Securities and Exchange Commission’s (SEC) regulatory approach effectively serving purchasers? This Note answers this question in the negative and explores the disconnect between the SEC’s approach and the actual protection of purchasers. First, it briefly surveys the value of cryptocurrency like XRP to outline the many forms digital assets take beyond a passive, speculative investment. Second, it outlines the framework for SEC enforcement under the Supreme Court’s Howey test for “investment contracts” and securities registration requirements in Section 5 of the Securities Act. Third, it examines the Ripple court’s holding regarding reasonable expectation of profit to distinguish XRP trading activity from investment contracts under Howey. Fourth, it contends that the Ripple court’s focus on enforcing securities law to protect reasonable investor expectations of profit is a proper step toward addressing a larger regulatory disconnect between the SEC and the investing public it is entrusted to serve.

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