A New York court ruled on Thursday that Ripple's token, XRP, was not a "financial security", a decision that sent the crypto market into a tailspin. But this position only applies to sales of tokens via exchange platforms.

An atmosphere worthy of the "Bull market". Since Thursday evening, and the decision of a New York judge in the lawsuit between the American company Ripple and the American stock market regulator (SEC), the crypto markets have been on a steep rise. This is because the magistrate ruled that XRP should not "necessarily" be considered a "financial security" when it is sold on the secondary market, i.e. on an exchange.

"A sale that takes place on the secondary market does not establish a direct link between Ripple and the buyers," confirms Morgane Fournel-Reicher, a lawyer at Kramer Levin specialising in digital assets and US financial law. "The latter can buy the XRP token without knowing the Ripple company," she points out.

This analysis likens a token like XRP to a commodity. One of the most common is oil. Barrels of oil are bought for what they are, regardless of the company selling them.

This approach is excellent news for the crypto ecosystem at a time when the SEC is accusing a huge number of projects of being "financial securities", and therefore of having been issued illegally. These include Cardano (ADA), Solana (SOL), Polygon (MATIC), Binance Coin (BNB), Cosmos (ATOM).

Even though Judge Analisa Torres clarified that the decision for Ripple did not affect other crypto projects, the whole market went wild.

Sale to institutional investors requalified

Does this mean Ripple has won? Far from it! Because the judge found that the sale of tokens by Ripple to institutional investors (companies, banks and others) made XRP an illegally issued financial security.

According to court documents, since 2013 the Californian start-up had been distributing a prospectus aimed at investment funds in which it linked the value of XRP to the future success of the company. The aim of the operation was obviously to raise money.

According to the SEC, Ripple sold $729 million worth of tokens directly to institutional investors. And that changes everything, especially when you consider that sales on the secondary market accounted for just 1% of XRP's trading volume, according to the SEC. The bulk of the business concerns sales to institutional investors.

"In this case Ripple was reaping an immediate capital gain, the relationship between the two parties was contractual, with conditions laid down for future resale," points out Morgane Fournel-Reicher.

The problem is that many crypto projects born since 2018 have resorted to this strategy. Very often, blockchain creators grant large quantities of tokens during private sales before the public launch of the network. These projects are nicknamed "VC Chains" to refer to the fact that they are financed by venture capital funds.

Solana is among the best known, but we can also mention Aptos (launched at the end of 2022), which raised $350 million in this way.

"It is important to note that institutional investors who bought directly from Ripple may find themselves subject to class action litigation as potential subscribers. This is an area to watch closely, especially if high-profile VCs were involved," warned UK investment firm CoinShares in a note.

What rules after this ruling?

First and foremost, it should be made clear that it is highly likely that Ripple will appeal the ruling due to the financial consequences on the institutional side. This would overturn the entire ruling and a new trial would have to retry everything. With the risk of losing everything.

In the meantime, the crypto ecosystem has much better visibility over what qualifies as a financial security and what does not. The judge did not comment on the fundamental nature of XRP as an asset. She based her decision on the way in which it is sold.

"Unless the United States decides to create a legal framework for cryptos, the tokens that are sold on exchange platforms could escape classification as financial securities and come closer to commodities," points out Morgane Fournel-Reicher.

For projects that have benefited from private sales, their future looks bleak in the United States.

And there are many of them...

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This analysis does not constitute investment advice. It has been written without taking into account your personal circumstances, including your financial situation, risk profile and investment objectives.

Before investing in any product, investors should fully understand the risks involved and consult their own legal, tax, financial and accounting advisors.