Why The Ripple Ruling Is Bad News For Ethereum (ETH)

The summary judgment in the Ripple vs. the US Securities and Exchange Commission (SEC) case is celebrated as a huge victory for XRP and the entire crypto space. While the court determined that Ripple’s sale of XRP to institutional investors constituted an unlawful security sale, it found that XRP did not qualify as a security when sold to the general public.

Impact Of The Ripple Ruling On Ethereum

Bryan Jacoutot, Partner at Election Law Group, delved into the intricacies of the ruling, expressing skepticism about its reasoning. In a Twitter thread he argues that the court’s distinction between institutional investors and programmatic buyers is flawed. The court held that since the programmatic buyers did not know who was selling them XRP, they could not have expected profits from the efforts of Ripple.

However, Jacoutot contends that under the well-known Howey test, the focus should be on whether buyers expected profits from the efforts of a third party, regardless of knowing the specific seller. He questions why the court emphasized the funding of the common enterprise rather than the buyers’ expectation of profits.

Jacoutot further points out that the court’s ruling is limited to the specific context of institutional investors and does not address the issue of whether secondary sales, such as peer-to-peer transactions through exchanges, constitute securities. Therefore, even if the ruling is upheld, it does not provide clarity for other cryptocurrency projects.

Moreover, the implications extend beyond Ripple to the Ethereum Foundation, to ETH and all other pre-minded coins. Jacoutot wrote:

I’ve reviewed the district court ruling on XRP and it rests on very shaky ground. Expect an appeal. AND Ethereum Foundation remains at risk even if it is upheld because of important distinctions in the methods used by Ripple to sell the pre-mine.

The lawyer highlights the similarities between the pre-sale of Ethereum and Ripple Labs’ sale to institutional investors. He notes that in the Ethereum presale, buyers were aware they were purchasing ETH from the Ethereum Foundation, which the court found significant in the Ripple case.

Additionally, the Ether purchased during the pre-sale were subject to a lockup period, further paralleling the circumstances that led the court to deem Ripple’s sale to institutional investors as a security offering. This suggests that Ethereum may also face legal challenges regarding its pre-sale activities, according to the lawyer.

Chia Jeng Yang, Principal at American hedge fund Pantera Capital, echoes this opinion. Via Twitter Yang stated that “Ripple’s ruling seems to be positive news for market makers, and for tokens that are decentralized enough,” adding that it’s “bad news for anyone who held a private sale/ICO, even to institutional investors.”

Overall, the Ripple ruling represents a significant development in the regulatory landscape for cryptocurrencies. While it is undoubtedly a victory for Ripple, the potential repercussions extend beyond the company itself. The Ethereum Foundation and other projects face lingering uncertainties, and the court’s decision leaves many other complex securities questions unanswered. An act of the U.S. Congress could change that.

At press time, the Ether price stood at $2,000.