Three years have passed since a U.S. court found that XRP itself cannot be uniformly viewed as a security. The ruling, which distinguished between XRP sales on public exchanges and direct sales to institutional investors, is seen as an event that changed the direction of not only Ripple Labs but also U.S. cryptocurrency regulation overall.

On July 13 local time, blockchain outlet U.Today reported that U.S. District Judge Analisa Torres of the Southern District of New York issued a summary judgment on July 13, 2023, in a lawsuit between the U.S. Securities and Exchange Commission and Ripple Labs.

The core of the ruling at the time was that the digital asset XRP itself is not treated as a security in all situations. The SEC filed suit against Ripple in December 2020, seeking to define XRP sales broadly as unregistered investment contracts.

Torres, however, applied the Howey test, used in the United States to determine whether something is an investment contract, according to the specific way XRP was sold. As a result, she found that Ripple’s programmatic sales conducted on public cryptocurrency exchanges did not constitute securities sales.

The court found that when retail investors buy XRP in the secondary market through an anonymous order-book method, it is difficult for them to know whether their funds are directly delivered to Ripple. It also found it difficult to conclude that such investors expected profits by relying on Ripple’s managerial efforts.

Accordingly, the court concluded that XRP transactions on public exchanges do not meet key requirements of the Howey test. That finding partly eased regulatory uncertainty surrounding XRP trading in the circulation market and left an important precedent for the cryptocurrency industry.

The court did not, however, find all of Ripple’s XRP sales lawful. It accepted the SEC’s argument regarding direct sales to institutional investors. Torres ruled that XRP transactions worth about $728 million that Ripple directly sold to institutional investors were unregistered securities offerings. She cited that institutional investors knew they were buying tokens directly from Ripple and could expect investment results to depend on the company’s business expansion and managerial activities.

In this way, the ruling presented a standard under which even the same XRP could be judged differently for securities status depending on the buyer and transaction structure. It distinguished between anonymous trading on public exchanges and contracts in which a company sells directly to institutions.

With the third anniversary of the ruling, attention is again on the pressure the lawsuit placed on Ripple’s management at the time. Ripple Chief Executive Brad Garlinghouse has said the company even considered halting operations when the SEC filed suit. Garlinghouse said, “When the SEC filed suit, I almost made the decision to shut down the company,” adding that responding was not easy because a government agency effectively held massive authority and resources.

Ripple Chief Technology Officer David Schwartz also explained that legal advice was behind the company’s serious consideration of the possibility of closing. It means the lawsuit was seen as an issue that could determine whether Ripple would survive, beyond a simple regulatory dispute.

The July 2023 ruling has since been repeatedly mentioned in discussions over digital asset regulation. That is because it presented a standard that calls for examining how a particular cryptocurrency was sold and whose efforts investors relied on to expect profits, rather than whether it is inherently a security.

Its symbolism was particularly significant in that it put the brakes on the SEC’s approach of trying to classify XRP as a security across all transactions. Ripple and the XRP community call July 13, the date of the ruling, “XRP Victory Day.”

Still, it is difficult to see the decision as a complete victory for Ripple, as it also included a finding of securities law violations for institutional sales. Even so, the court’s distinction between XRP itself and individual sales contracts is seen as a decisive turning point that left the principle that crypto regulation should separately examine the asset and the act of trading.