Is This Ruling a Turning Point for Cryptocurrency Regulation?

There was a time when I thought Brad Garlinghouse’s legacy would be a peanut butter manifesto. In a 2006 essay, Yahoo! vice president Garlinghouse explained that the company had spread itself too thinly across its work projects, preventing it from being truly great at anything. You know, like spreading peanut butter too thinly on a slice of bread.

It was the best definition of clutter I’ve ever seen, and it was an unforgettable milestone in Yahoo!’s journey from online empire to fading historical footnote.

Brad Garlinghouse hasn’t stopped setting standards since that writing. He bounced around a few consulting and executive roles before taking the CEO spot at Ripple Labs in 2015. The XRP (CRYPTO:XRP) cryptocurrency, commonly referred to as Ripple because of its underlying organization and global payments service, may have turned the page on American crypto regulation this week — still under Garlinghouse’s reins.

Image source: Getty Images.

SEC and Ripple story so far

Let’s start with a quick recap. Any Ripple investor worth their salt is aware of the organization’s legal challenges. The Securities and Exchange Commission (SEC) filed a lawsuit against Ripple Labs and several key executives (including CEO Brad Garlinghouse) in December 2020.

In this case, the SEC argued that the XRP cryptocurrency should be marketed like a proper security (stock, bond, investment contract, etc.) with SEC registration and other legal requirements. The Ripple team wanted the currencies to be treated like dollars, euros, or yen, which are commodities with looser regulatory restrictions.

The back-and-forth in this process has set the tone for Ripple’s price chart ever since. Last summer, District Judge Analisa Torres dismissed most of the SEC’s complaints, placing Ripple in the commodity category as long as the organization was dealing with amateur investors who were users of its RippleNet payment system.

The case has moved to a jury trial to determine how Ripple should be treated with respect to professional investors. The SEC sought $2 billion in damages based on the XRP startup raising $723 million from “sophisticated buyers.” Ripple said it should owe no more than $10 million for a bureaucratic error when it launched a new asset type in 2013.

What’s up?

That brings me to Wednesday, August 7, 2024. Judge Torres made her final decision in the SEC’s remaining case, and it was far from the costly penalty sought by regulators.

The ruling ordered Ripple Labs to stop selling any assets to professional investors without properly registering them as securities with the SEC and to pay the court a $125 million fine — about 6% of the SEC’s proposed fine and a slap on the proverbial wrist for the Ripple Labs organization.

The story continues

As a private company, Ripple Labs is not required to disclose its financial details or the size of its cash reserves. However, the group has recently given a few hints about its financial health. Ripple bought back $285 million worth of private stock earlier this year, giving it a total market value of $11.3 billion. At the time, Garlinghouse said Ripple Labs had more than $1 billion in cash and $25 billion in cryptocurrency. And the total market value of the XRP cryptocurrency, excluding cash pools held in foreign countries as a functional part of the border-crossing payment network, is now $61 billion.

So Ripple can easily waive this civil penalty and continue on its path as a powerhouse in the international money transfer space. Crypto investors immediately embraced the decision — Ripple’s price rose 27% in a 90-minute run as the gavel echoed across the internet.

The implications of Ripple’s legal victory for all cryptocurrencies

More importantly, Judge Torres’ decision should help regulators and investors solidify the legal framework for creating, selling, buying, and owning cryptocurrencies in general.

The $125 million fee won’t bankrupt Ripple, but it’s still a penalty for financial improprieties. Analisa Torres has classified XRP as a security in some cases (such as when dealing with professional investors and money managers), but not in general use (such as operating a payment network or trading cryptocurrencies on the public market).

I am not a lawyer, and you should not take my analysis as legal advice at any level. And the SEC could appeal this negative decision, keeping the long case in litigation for several more years. But as it stands, the binary nature of this decision points to a future where cryptocurrencies with different designs and real-world use cases may operate under different regulatory rules.

Again, I could be wrong and the SEC objections could throw a digital wrench into the resilient crypto future I envision. If I’m in the right zip code as the real future, crypto investors should enjoy a robust yet friendly legal system in America, setting the tone for better regulatory crypto systems around the world. Beyond the direct impact on Ripple and its investors, leading crypto names like Bitcoin and Ethereum will also feel these positive tailwinds.

Investors hate uncertainty, and this decision is at least a small step toward greater transparency, trust, and collateral in the cryptocurrency market. This newfangled asset class is growing and trying to figure out what it really is. The final answers are less important than the process of finding them.

That’s why Judge Torres’ final decision is a big deal, and not just for Ripple investors. Future crypto holders may remember this Wednesday as a game-changing moment for the entire crypto market. I can finally stop thinking of Brad Garlinghouse as “that peanut butter guy.”

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Anders Bylund has positions in Bitcoin, Ethereum, and XRP. The Motley Fool has positions in and recommends Bitcoin, Ethereum, and XRP. The Motley Fool has a disclosure policy.

The Ripple Effect: Is This Decision a Turning Point for Crypto Regulation? was originally published by The Motley Fool

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