Ripple Ruling: Coinbase Might Be The Biggest Winner

Summary U.S. District Judge Analisa Torres ruled that XRP tokens sold directly to institutional investors are securities and should have been registered with the SEC. The ruling has implications for Ripple Labs and XRP, with the former having sold unregistered securities, while the latter can continue to be sold to retail buyers. The decision could impact the SEC's lawsuit against Coinbase, as coins listed on the platform cannot be considered securities based on the ruling's language. Of all of the dramatic things that have happened in the cryptocurrency industry in the last 12 to 18 months, the most significant from a long term impact standpoint might be the SEC/Ripple ( XRP-USD ) case decision from U.S. District Judge Analisa Torres on July 13th . Ripple vs the SEC XRP was launched by Ripple Labs in 2012. While XRP has been a somewhat controversial coin in the broader crypto community given the justifiable concerns about centralization, XRP has been among the top 5 to 10 cryptocurrencies by market capitalization since launch. In 2020, the US Securities and Exchange Commission filed a lawsuit against Ripple Labs for the alleged selling of unregistered securities. The outcome of that suit has been a major regulatory headwind for the broader cryptocurrency market ever since. In her decision, Judge Torres ruled XRP tokens sold directly to institutional investors are securities and should have been registered with the SEC. However, Torres also found that XRP tokens that were acquired by non-institutional investors from secondary sales through exchanges are not securities. Ripple Impact There are different implications here for Ripple Labs and XRP. For Ripple Labs specifically, this is less positive as the judge ruled that the company did sell unregistered securities through closed funding rounds. However, XRP sold to retail buyers can proceed and we're already starting to see exchanges relist XRP. In the chart below, we can see the enormous spike in both coin price and real volume in response to the news. XRP Price & Volume (Messari) This surge is not surprising and is potentially indicative of renewed interest in XRP for cryptocurrency buyers domestically. Even after the SEC's lawsuit was filed in 2020, XRP has still been available on a variety of crypto exchanges; including Binance ( BNB-USD ) and KuCoin. However, several US-based exchanges delisted the token in response to the SEC lawsuit. Most notably, Coinbase ( COIN ) ended trading of XRP in January of 2021 . At the time, Coinbase was the 4th ranked global exchange by trade volume and it has generally been in or near the top 5 since. Following the court ruling from Judge Torres, Coinbase has already indicated it will re-list XRP. XRP Holder Distribution (Santiment) With the top domestic cryptocurrency exchange re-listing XRP, it's worth watching how the coin distribution trend behaves over the next several months. Going back to late early January 2021, we've already seen wallet addresses with 10k-100k XRP coins increase from 106k to nearly 236k today. Coinbase Impact And that brings us to the impact on Coinbase. The SEC sued Coinbase in June. In that suit, the agency alleged the company was operating as a broker, exchange, and a clearinghouse for unregistered securities. This Ripple ruling is very damaging to the SEC's argument because coins listed on Coinbase can't be considered securities based on the language of the Ripple decision: # Name IEOs Raise (sorted) Market Cap 1 Gate.io Startup 328 $ 156.24M $ 3.16B 2 Binance 34 $ 130.72M $ 14.48B 3 OKX Jumpstart 18 $ 55.64M $ 769.84M 4 KuCoin Spotlight 26 $ 45.33M $ 1.13B 5 Bgogo 3 $ 40.73M N/A Source: CryptoRank In the table above, I'm showing the top 5 exchanges by capital raised via Initial Exchange Offering, or IEO. We can see Gate.io and Binance have served as the largest vehicles for capital raised through IEO. There are roughly a dozen others that have raised capital through IEO but to a lesser degree. Notably missing from this table is Coinbase and there's good reason; Coinbase never sold any cryptocurrencies via IEO. Thus, any coins purchased through Coinbase exchange were secondary sales and are not considered securities per the Ripple ruling. To be clear, Coinbase does have a venture capital arm that has invested directly in crypto protocols through closed funding rounds. For instance, Polygon ( MATIC-USD ), Aptos ( APT-USD ), and Lido Finance ( LDO-USD ) received investment from Coinbase Ventures. But because those coins weren't sold directly through Coinbase as ICOs, it's difficult to justify calling those tokens securities based on what judge Torres just decided about XRP. From where I sit, there are two direct impacts from this ruling on Coinbase: The SEC lawsuit against Coinbase just took a major hit Altcoins on Coinbase's exchange are fair game for previously cautious US buyers Given these two points, I believe we could see a spike in exchange volume on Coinbase now that there appears to be more clarity in the US for the time being. Intraday Moves 7/13/23 (Seeking Alpha) The immediate market response to the ruling has been positive for the crypto market broadly. But the biggest gainers since the XRP decision are the coins that have been most recently designated securities by the SEC. Solana ( SOL-USD ), Polygon, and Cardano ( ADA-USD ) all rallied between 18-20% following the decision. At one point in the hours following the ruling, XRP was up over 90%. If this is the beginning of FOMO buying altcoins, Coinbase is likely in a strong position to benefit. Especially if the Federal Reserve starts pumping the brakes on interest rate hikes and there is a return to some sort of easing policy this year. Risks For Crypto Bulls There is the potential the SEC may take another crack at this. The agency could take this to the court of appeals. However, according to attorney James Murphy on a recent podcast appearance, the SEC has to consider if appealing the Ripple ruling is a wise strategy for the Coinbase case: If they appeal to the 2nd circuit, and the 2nd circuit court of appeals affirms the decision in Ripple, that is a binding precedent in the Coinbase case which is also the southern district of New York. Southern district of New York must follow decisions of the 2nd circuit. Non-legal risks to the bullish market reaction include the possibility that profit takers will limit the potential many of these coins have to run. It's been a tough crypto winter for altcoin holders. We've seen the resurgence of Bitcoin ( BTC-USD ) dominance over the last year. And some crypto holders may look to cut their losses on the news-related jump. Investor Takeaways The XRP ruling is a major development for the cryptocurrency industry domestically. Crypto builders in the US have been begging for regulatory clarity and they received a big life raft from Judge Torres in this Ripple ruling. It's difficult to guess whether the SEC will appeal the decision or not but my hunch is the agency will do so. But until that happens, crypto winter certainly appears to be turning to crypto spring. I'm not sure I'd chase COIN stock at $105. But if I were short, I'd be very concerned.