On July 13, 2023, a Manhattan-based federal judge issued a summary judgment order in U.S. Securities and Exchange Commission v. Ripple Labs, Inc., et al. (Ripple) – one of the most closely-watched digital asset-related lawsuits filed to date. Ripple involves a fundamental issue that has instilled regulatory uncertainty throughout the crypto industry, including among insurers of crypto-based enterprises: whether a company (in this case, Ripple) and its directors and officers violated federal securities laws by offering and selling a proprietary digital asset (in this case, XRP, which at times has been one of the most heavily traded digital assets in the world) without registering the asset as a security. The court’s summary judgment ruling may not have provided the regulatory certainty for which the industry has yearned. Leaving no clear prevailing party, the court granted in part and denied in part the SEC’s and the Ripple defendants’ competing motions for summary judgment. Although neither side notched a complete victory – and obvious puns aside – the decision is likely to have reverberating effects across the industry.

More specifically, reasoning that “XRP, as a digital token, is not in and of itself” a security, but that “transactions and schemes involving the sale and distribution of XRP” nonetheless could be structured as investment contract securities, the court held in pertinent part that: (1) Ripple’s marketing and sales of XRP directly to sophisticated investors violated federal securities laws because, among other things, such investors reasonably understood that Ripple would use their investments to enhance XRP’s value; (2) Ripple’s programmatic sales of XRP on digital asset exchanges did not violate federal securities laws because, among other things, these sales were “blind,” such that the buyers and sellers did not know one another’s identity and, thus, unlike the sophisticated investors, the programmatic buyers could not reasonably have expected that Ripple would use the sale proceeds to enhance XRP’s value (because they could not have known if Ripple was their transaction counterparty); and (3) Ripple’s other distributions of XRP (e.g., as compensation to employees) did not violate federal securities laws because the recipients of such XRP distributions did not invest money, as opposed to services.

Although the Ripple decision was not a complete defense victory, crypto industry participants have celebrated the ruling as a major milestone, cause for optimism and breathing room, and potential catalyst for the industry to flourish in accordance with the law. The crypto market likewise reacted favorably, with the value of XRP skyrocketing upwards of 100% in the wake of the ruling. And some industry observers have suggested that the ruling may give the SEC pause as to the robust enforcement activity that it has pursued with respect to the crypto industry, which has included myriad investigations and large settlements arising out of so-called initial coin offerings (ICOs) that abruptly went out of fashion several years ago.

All of this said, hailing the Ripple ruling as a watershed “all clear” development in the crypto space likely is overstating the issue, particularly given the possibility of protracted appeals, the pendency of other significant digital asset lawsuits in other federal courts across the country, and pending or new legislation that may alter the legal landscape in the interim. Thus, from a management liability insurance perspective, although the Ripple ruling certainly is a step in the right direction, whether and to what extent the ruling will soften the insurance market for the crypto sector – which generally has been less friendly to insureds than other sectors when it comes to pricing, coverage, and available capacity – remains to be seen. Given the challenges that crypto insureds face in the management liability insurance market, such insureds should ensure that they are routinely auditing their policies and strategically working with experienced brokers to optimize coverage terms and conditions. Brokers who understand these events will be able to help navigate market uncertainty, facilitate insurers’ underwriting of each business based on its own merit, and optimize results while further developments unfold.

Securities and Exchange Commission v. Ripple Labs Inc., 1:20-cv-10832-AT-SN, (S.D.N.Y. Jul 13, 2023) ECF No. 874

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If you have questions about your coverage or are interested in obtaining coverage, please contact your Aon broker. Discuss this article with Financial Services Group professionals Nicholas Reider and Glenn Morgan.



Nicholas Reider
Senior Vice President, Deputy D&O Product Leader – West
Denver










Glenn Morgan
Senior Vice President, Digital Assets Practice Leader
San Diego




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