A U.S. federal court has allowed a class-action lawsuit to proceed against Ripple Labs, following allegations that CEO Brad Garlinghouse made misleading statements regarding the status of XRP as a security.

In a significant ruling on June 20, California District Court Judge Phyllis Hamilton denied Ripple's request for summary judgment, thereby allowing the lawsuit to move forward. This case centers on whether Ripple's CEO, Brad Garlinghouse, violated California securities laws by making misleading statements during a 2017 interview with Canada’s BNN Bloomberg. In this interview, Garlinghouse asserted he was “very, very long” on XRP, despite allegedly selling millions of XRP tokens throughout that year.

Judge Hamilton’s decision specifically permits the lawsuit to address the claim about Garlinghouse’s potentially misleading statements, while dismissing four other allegations related to Ripple's failure to register XRP as a security.

Ripple had argued for the dismissal of the misleading statement claim on the grounds that XRP does not qualify as a security under the Howey test. They referenced a landmark ruling from July 2023 by Judge Analisa Torres, who found in favor of Ripple in a case brought by the Securities and Exchange Commission (SEC). However, Judge Hamilton diverged from this interpretation, concluding that XRP could indeed be considered a security when sold to non-institutional investors. She emphasized that these investors would likely expect profits derived from Ripple’s efforts, fulfilling one of the criteria of the Howey test.

Judge Hamilton elaborated, “The court declines to find as a matter of law that a reasonable investor would have derived any expectation of profit from general cryptocurrency market trends, as opposed to Ripple’s efforts to facilitate XRP’s use in cross-border payments, among other things. Accordingly, the [court] cannot find as a matter of law that Ripple’s conduct would not have led a reasonable investor to have an expectation of profit due to the efforts of others.”

This ruling marks a departure from the optimism that many in the U.S. crypto industry had following Judge Torres' decision, which was hailed as a significant victory for the sector. Industry experts had anticipated that Judge Torres' ruling would serve as a precedent for other crypto-related cases.

However, recent developments suggest that this optimism may have been premature. For instance, in the SEC’s case against Terraform Labs, Judge Jed Rakoff, from the same district as Judge Torres, rejected Terraform’s motion to dismiss, disagreeing with the Ripple ruling. Ultimately, Terraform Labs was ordered to pay a $4.5 billion settlement to the SEC.

As the case against Ripple moves forward, the outcome could have substantial implications for the broader cryptocurrency market, particularly regarding the classification and regulation of digital assets.