A federal court decision on a closely-watched crypto case involving Ripple Labs Inc. is taking Coinbase Global Inc. advocates back to a time when the potential for the largest US digital-asset exchange seemed almost limitless.
Shares of Coinbase rallied 24% on Thursday after the ruling was seen as potentially narrowing US Securities and Exchange Commission oversight when it comes to what can be listed on crypto trading platforms. The stock surge was the most since Coinbase jumped 31% at its debut on the Nasdaq in April 2021.
The rally is the latest in a recovery this year by Coinbase amid a rebound in Bitcoin’s price, despite its regulatory challenges from a lawsuit by the SEC, which alleged the platform was an unregistered securities exchange. Coinbase shares tumbled 86% last year. Cryptocurrencies, including Bitcoin, XRP, Solana and Cardano, broadly rallied after the ruling.
“Coinbase is a secondary market exchange, and this type of opinion really calls into question whether the SEC’s approach with respect to secondary market exchanges make sense,” said Daniel Tramel Stabile, a partner at Winston & Strawn.
The ruling from the Ripple case should bode well for Coinbase, because it “undermines the SEC’s position that tokens sold on Coinbase’s platform were sales of unregistered securities,” said David Brill, former deputy general counsel of bankrupt crypto broker Voyager Digital.
Still, the decision from Ripple’s case is just one district court opinion and is not binding in other parts of the country, and the SEC could still appeal, said Stabile.
US District Judge Analisa Torres in New York ruled that the Ripple’s XRP token is a security when sold to institutional investors. But the judge said that didn’t apply to programmatic investors, meaning the broader public buying crypto on exchanges.
Whether cryptocurrencies are securities has been a major question hanging over the industry, which has long fought efforts to regulate it by arguing that they are not. The SEC sued Coinbase in June for the sale of unregistered securities.
News of the Ripple ruling broke Thursday while a court hearing on the the SEC’s lawsuit against Coinbase in New York was ongoing. SEC lawyers sitting together in the courtroom gallery read the Ripple decision simultaneously, said Elliott Stein, a senior legal analyst at Bloomberg Intelligence, who was at the courtroom.
US District Judge Katherine Polk Failla asked the SEC how someone would be able to determine whether a crypto token would be considered a security or not, and if such a distinction has been communicated properly to those operating in the crypto industry. The SEC responded by citing the Howey Test, a 1940s precedent laid down by the Supreme Court that is used for determining whether a transaction is considered an investment contract.
Meanwhile, Coinbase was quick to herald the Ripple decision. The exchange will relist XRP for trading after reviewing the court ruling, Paul Grewal, chief legal officer of Coinbase, said in a tweet.
“Although the judge’s order does not pertain to secondary transactions, which are out of scope of the Ripple lawsuit, the order affirms the view that the same crypto asset may be sold as both a security and a non-security, depending on the facts and circumstances,” said Michael Selig, counsel at Willkie Farr & Gallagher LLP
Coinbase shares closed at $107 on Thursday, bringing the gains since December to more than 200%, helping to cushion the blow from last year’s decline.
When Coinbase first began to trade on Nasdaq in April 2021, the stock had climbed as high as $429.
--With assistance from Teresa Xie.
(Adds comment on a separate SEC hearing in the ninth paragraph.)