Warning: I am not a lawyer or attorney so below is my own understanding of the situation after following it for over 2 years.
The SEC v Ripple judgment is a monumental win for the crypto industry and Presearch because it provides some clarity on the regulatory status of cryptocurrencies and establishes that not all digital assets are securities.
First, the ruling hits on 4 major issues:
1. Did Ripple Labs – A software company that builds products for banks sell XRP (a digital asset crypto currency token) packaged in a way that should have been registered as a security? The judge ruled yes, Ripple Labs violated securities laws in some instances selling unregistered securities to institutional clients. This is a minor win for the SEC and was anticipated by most of the crypto industry, not a big deal. This is also not a big deal for Ripple Labs since 95% of their current institutional clients are outside of US jurisdictions. Yes there could be a fine if it is proven that a profit was made, that could be disgorged plus a fine in the final decision. But this is also possibly a good thing for XRP holders because this could affect how current and future US institutional clients some of the biggest financial institutions in the world may be allowed to purchase XRP for its utility. If Ripple chooses not to get specific banking licenses or to register security sales with the SEC; then the only way these US institutions might be able to purchase XRP is through the exchanges from current holders and Ripple Labs!
2. Did Brad Garlinghouse and Chris Larson (two founders and Brad the CEO of Ripple Labs) individually abed this scheme of selling XRP (the digital asset in a packaged way) as unregistered securities? The judge will let a Trial by Jury decide this, likely to occur sometime next year.
3. Is XRP (the digital asset itself) considered a Security? No
4. Was XRP sold on the secondary markets (exchanges, DEXs) whether by Brad, Chris, or Ripple Labs or any other party considered a Security? The judge ruled XRP the asset itself is NOT a security and XRP sold on secondary markets are also NOT securities. This is a MONUMENTAL WIN for the Entire Crypto industry putting the US SEC back in their box.
One was decided by the judge but two will be decided by a trial jury probably a year from now. Three and four are the big monumental wins for the crypto industry. These are also the wins the SEC and other TRADFI aligned entities don’t want people to understand or know about. To all the BTC maxis, BTC is not a significant threat to the Traditional Financial or Monetary system but XRP and a few others ARE! Which is evident as to why they went after XRP and gave BTC a free pass! BTC is a great idea, XRP however, is the most probable realization of that idea. The sooner people get this the better. The outcome of the trial next year will determine the potential corrective measures or penalties that may follow, which could be months after the jury decision. This will be the judge’s final judgment in the SEC v Ripple case. Only after all trials and decisions have been made, with one exception, can the SEC, Ripple Labs, Brad Garlinghouse, or Chris Larson appeal to a higher court, including the Supreme Court. This means no appeals can be made before late CY24 or CY25. The decisions would stand until an appeal and even through the entire appeals process. The only exception is an interlocutory appeal.
“When Can a Party Appeal a Summary Judgment Order?
As a general rule, orders issued by a court while a case is still pending—known as interlocutory orders—are not subject to appeal before the trial court enters a final judgment…
Appealing an Interlocutory Summary Judgment Ruling Before Trial
A federal court of appeals may hear an appeal of an interlocutory order under 28 U.S.C. § 1292(b) and FRAP 5, but the standard is difficult to meet. It requires permission from both the district court and the court of appeals.”
Interlocutory appeals must be filed within 30 days of the summary judgement decision. This type of appeal is unlikely and even if granted the decision will stand while the appeals process plays out.
The Judge’s decisions are entirely consistent with the law at least in US jurisdictions, and were accurately predicted by the lawyers, former SEC officials, and XRP community. Some additional resources to dig in and learn more presearch: Attorney John E Deaton, Attorney Jeremy Hogan, Attorney Stuart Alderoty (Ripple CG), Brad Garlinghouse (Ripple CEO), and many community members. Bottom line don’t believe the talking heads that got it wrong all this time over the ones closest to the case who accurately predicted this outcome and exposed the corruption of the SEC. Since the Howey Test was created in 1946 the underlying Asset itself has never been deemed a Security. What matters is how the asset is packaged and/or sold through marketing, verbal or written contracts.
The Howey Test is a way to determine if something is an investment contract (a Security). It asks four questions:
1. Is there an investment of money?
In this case for sales from Ripple or Secondary sales Yes. But in other cases of airdrops, gifts, or if received the digital asset as payment for something or income then NO there is not an investment of money.
2. Is there an expectation of profits?
Likely yes for both but some purchasers were simply using it as a intermediary currency to buy things or transfer funds around the world. In most cases yes in some cases no
3. Is the investment in a common enterprise?
For Ripple Labs in some cases yes. But for the average secondary market sales in which people may have not even been aware of a company called Ripple Labs then absolutely not. XRP is not a stock of a private or public company it is an asset that can be used by anyone and can be built on by anyone. (XRP itself may be more like a commodity similar to oil, gold, cows, etc. It could also be considered a currency. But the Asset itself unlike what the SEC was attempting to claim has never been the security. I hear some people trying to relate XRP to a stock or bond which is a completely fallacious argument. Stocks and Bonds are tied to a specific company or entity via contracts and is therefore an investment in that entity or ‘common enterprise’ which also relies on the efforts of that entity or others for the investor’s profits. So yes stocks and bonds are securities BUT XRP is not a stock or bond of anyone or anything just like a cow or oil or gold itself is not either.
4. Do the profits come from the efforts of others?
In most cases yes. But if you are a developer or a company that will use or build on XRP or PRE yourself then your profits are not from the efforts of others.
If the answer is yes to all four questions, then it’s likely an investment contract.
Does this ruling protect all crypto currencies? NO! The reason is because not all cryptos are the same they operate differently (PoW, PoS, Consensus, etc.); who or what entity(s) created, own, hold, or sold/distributed tokens and in what ways (ICO vs airdrop vs DAO vs gifted); Additionally not all cryptos have the same diversity of utilities vs many that have zero utility.
Yes there are complexities surrounding if something is considered a security but the judge upheld in this case that the asset itself is not and the sales on the secondary markets are not. Congress could make new laws that judges would then have to take into consideration but until then XRP and similarly situated cryptos now have some clarity where there was None before. This is HUGE! Additionally, there are many SEC cases that are in the courts with cryptos and exchanges that might challenge many of these other factors and create further damage/uncertainty or upon judgment potential additional clarity to the crypto industry. Until more rulings if they make it that far or new laws are created it seems prudent to attempt to conform and rally around as much as possible to XRP. Since XRP now has the most clarity of any digital asset in the crypto space.
How does this relate to PRE and what are some things to consider?
-It seems the sooner tokens can be traded in the secondary markets (bought and sold by individuals not the creator or any 3rd party promoter itself) the better.
-The mechanism in how the token itself operates may or may not be a consideration of if the asset might be considered a security. All we know is XRP itself is not a Security so looking at how XRP works and how the XRPL is secured might be a consideration. XRP uses a Consensus mechanism not PoW or PoS and no one is paid or rewarded for supporting/maintaining the XRPL network with nodes. This is different than BTC and others who use PoW in which miners are rewarded for maintaining the network. It is also different from Ethereum and many others that utilize PoS in which token holders stake their tokens and are rewarded for maintaining the network. This means Presearch DAO may want to consider other L0s, L1s, or L2s to facilitate a Presearch multichain future. FLR (a fork of XRP - main net), SGB (a fork of XRP - test net), Hooks once it is built (will leverage XRP via sidechains), or some other Consensus blockchains/ledgers might be better initial alternative chains to Ethereum.
-Utility of the token and decentralization are clear factors for regulatory considerations and mentioned in the lawsuit many times. The utility of the asset for many applications could be very beneficial to ensuring future viability and continuation of the presearch idea. Building many utilities for PRE should be a priority and it doesn’t matter if those utilities are developed by Presearch, a DAO, other organizations, projects, or individuals as long as anyone can then leverage what has been built to profit for themselves, no longer relying on a ‘common enterprise’. Most of my recommendations for PRE utilities have been thought of or designed with this in mind. Many crypto projects only build utilities for their own token that only make the project, team, LLC, or individual creator a profit then you are starting to get into a ‘common enterprise’ argument because anyone investing money will now rely on that common enterprise for their own profit. However, if you build utilities that allow anyone to profit through their own efforts you begin to take away the common enterprise prong of the Howey Test.
Examples of this might be Presearch communities where an individual or entity is essentially buying their own small business in which their own efforts determine how many subscribers and profit they make; nodes - but only once payments become automated via smart contracts and are no longer reliant on Presearch itself to reward; advertising slot NFTs where by your efforts on or off the platform determines your profits; keyword staking and consumptive ads because anyone can use this utility to make profits with their own marketing efforts - as long as this is automated fairly; staking or consumptive payments for other users AI access and/or premium services access. because one could use this utility to give someone else privacy secured AI access or some other service in exchange for whatever (joining presearch, creating a background or educational video, or for some other compensation); Governance of the future of Presearch platform and/or other new community created applications, etc.
Bottom line utility and decentralization are huge. The sooner utilities are built and decentralization is achieved the sooner the project’s vision becomes secured in perpetuity.
We would never want Presearch LLC or a DAO to come under regulatory scrutiny or suddenly go out of business from insurmountable lawsuits but utilities that function for the benefit of all ensure the success of the project even if they do. Because users could still leverage the benefits of those established utilities and continue to build new ones without a ‘common enterprise’.