When the United States Securities and Exchange Commission filed legal action against Ripple Labs and its top-two executives in December, alleging that its XRP coin was in fact a security and that the firm had raised over $1.38 billion through an unregistered securities offering in 2013, many wondered if XRP would even survive.\u00a0<\/p>\n
Some exchanges delisted XRP; some asset managers sold their XRP tokens. XRP had lost its place as the top 3 currency by market capitalization and was even looking like it could drop from the top 10. But reports of Ripple\u2019s demise were spectacularly exaggerated. <\/p>\n
As of mid-April, XRP had increased 532% over the previous 12 months, and things also took a favorable turn recently in the SEC lawsuit, with the defendants prevailing in two discovery rulings \u2014 even turning the tables on the regulatory agency by winning access to the SEC\u2019s internal memos and minutes with regard to crypto discussions. \u201cThe SEC Is Now On Trial \u2013 And Knows It,\u201d sounded Forbes.<\/p>\n
But the lawsuit continues \u2014 indeed, it is being closely watched and has the potential to set legal precedents in a number of areas, Daniel Payne, partner in the fintech and blockchain practice at law firm Murphy & McGonigle, told Cointelegraph, including: <\/p>\n
\u201cThe application of the statute of limitations to token sales; the extraterritorial reach of the securities laws to token sales on worldwide blockchains; the application of the securities laws to digital assets that FinCEN has regulated as a virtual currency [e.g., BTC]; and whether courts will use Bitcoin and Ether as models of non-security digital assets in their legal analysis.\u201d<\/p><\/blockquote>\n
Therefore, while the defendants may have gained an edge in pre-trial rulings in SEC v. Ripple Labs, can one really say that Ripple\u2019s legal troubles are over?<\/p>\n
Not over till it\u2019s over<\/h2>\n
\u201cNot by a long shot,\u201d Carol Goforth, the Clayton N. Little professor of law at the University of Arkansas (Fayetteville), told Cointelegraph. Ripple made a good case for accessing the SEC\u2019s internal views on crypto \u2014 i.e., the first discovery ruling. And in the second contest:<\/p>\n
\u201c[Ripple executives] Garlinghouse and Larsen made a plausible argument that the SEC was over-reaching with its request for eight years of their personal bank records. As the insiders argued, why does the SEC need to know household expenditures in order to make its case?\u201d<\/p><\/blockquote>\n
\u201cHowever, although Ripple may discover information that will help its defense as a result of that \u2018win,\u2019 the extent to which this will matter in the long run is far from certain,\u201d said Goforth. \u201cThe two recent pre-trial discovery rulings have shifted the playing field of the case,\u201d added Payne. \u201cThe defendants have gotten traction with some important arguments, but that does not mean they have won the case.\u201d<\/p>\n
\u201cIt would be extremely premature to divine any significance from these interim ruling,\u201d agreed David Chase, a securities lawyer and former SEC enforcement attorney. These are really discovery skirmishes and don\u2019t go to the heart of the case, he told Cointelegraph.<\/p>\n
\u201cA different kind of case\u201d<\/h2>\n
A recent article in The<\/em> National Law Review<\/em> noted regarding SEC v. Ripple Labs <\/em>that \u201cthe SEC\u2019s case rests on the proposition that XRP is a security \u2014 if it is not, the SEC lacks jurisdiction,\u201d while Payne told Cointelegraph: \u201cThere are a handful of district court rulings that specific digital assets are securities: Telegram, Kik, ATBCoin, etc.\u201d Those cases have provided important precedents that the SEC relies on now to police new token issuances that it believes are securities offerings. Continued Payne:<\/p>\n
\u201cBut Ripple is a different kind of case. XRP was first sold over eight years ago, and over that time, the XRP ledger has become decentralized, while Ripple has, in large part, decoupled from XRP. But the SEC is alleging that XRP was and remains a security.\u201d<\/p><\/blockquote>\n
John Wagster, an attorney at Frost Brown Todd, informed Cointelegraph that like almost every SEC action in the cryptocurrency space, the claims against Ripple \u201cwill be analyzed by market participants looking for a pathway to compliant token offerings,\u201d adding: \u201cA healthy market needs regulatory consistency, and the most meaningful outcome of the Ripple enforcement action would be one that provides a clear path forward for future issuances.\u201d <\/p>\n
Yuliya Guseva, professor of law at Rutgers Law School, told Cointelegraph that \u201cthe Ripple case is exceptionally important.\u201d Even though it resembles the Kik and Telegram cases, the facts in SEC v. Ripple Labs are different. \u201cThe outcome of Ripple may have a profound effect on the crypto market. For one, the ultimate decision should provide more clarity to the developers and crypto community.\u201d She added:<\/p>\n
\u201cThe decision may reveal if we have transitioned from the bygone era of ICOs and related enforcement to a more mature market phase with a more nuanced doctrinal approach to cryptocurrencies.\u201d <\/p><\/blockquote>\n
Regarding the discovery ruling, Chase is interested to see the SEC\u2019s internal discussions about XRP and cryptocurrencies among the trove of documents now expected to emerge. \u201cIt usually runs just one way\u201d \u2014 i.e., companies delivering their documents to the court. But in this case, it is the SEC that has to produce the goods \u2014 not a \u201ctypical\u201d turn of events for the agency, suggested Chase.<\/p>\n
What is propelling XRP price upward?<\/h2>\n
But what is one to make of the run-up in XRP\u2019s market price in the past year \u2014 even before the discovery rulings. \u201cXRP price\u2019s journey to $1 this year has been nothing short of spectacular, considering the ongoing Securities and Exchange Commission lawsuit against Ripple initiated in December 2020,\u201d commented Cointelegraph Markets contributor Marcel Pechman. In the weekend following the pre-trial rulings, XRP added over 40%, standing at around $1.3 on April 18, while almost reaching the $2 mark on April 14.<\/p>\n
Wagster told Cointelegraph that the increase in XRP\u2019s market price over the past year has more to do with bullishness in crypto markets generally rather than anything specific to XRP, while Chase opined: \u201cMaybe what we\u2019re seeing is the free market in operation.\u201d The SEC\u2019s lawsuit \u201cis just another data point to be taken into account\u201d in an evaluation of XRP; investors could even be handicapping an eventual settlement with the agency.<\/p>\n
There may be another interpretation: Maybe the SEC\u2019s decisions just don\u2019t matter that much anymore when it comes to globally traded cryptocurrencies. Goforth disagrees. The SEC still plays a large role in regulating U.S. exchanges and other businesses, she said, while Payne noted that \u201cif a cryptocurrency has a touchpoint within the U.S., the SEC has an argument that it can assert jurisdiction.\u201d<\/p>\n
Related: <\/em><\/strong>You don\u2019t own me: XRP price surge defies SEC\u2019s clamp-down on crypto<\/em><\/strong><\/p>\n
He did allow, however, \u201cthat XRP is traded worldwide, where many purchasers may be unaware of the SEC\u2019s case,\u201d which may have something to do with XRP\u2019s price resilience. The price may also be affected by \u201cpurchasers who are betting that Ripple will win [the SEC case] and are trying to buy low.\u201d<\/p>\n
The U.S. Supreme Court provided the framework to determine whether an asset is a security in SEC v. Howey Co. \u201cThe Court explained that an asset is a security if it represents an investment in a common enterprise with the expectation of profits derived solely from the efforts of others,\u201d recounted The National Law Review<\/em>. The SEC has been applying the 71-year-old Howey Test ever since, and in its Ripple Labs complaint, the agency said XRP should be considered a security \u2014 explained the journal \u2014 because:<\/p>\n
\u201cInvestors who purchased XRP anticipated that profits would be dependent upon Ripple\u2019s efforts to manage and develop the market for XRP. Ripple has disputed the SEC\u2019s allegations, arguing that XRP is a \u2018fully functioning currency that offers a better alternative to Bitcoin.\u2019\u201d <\/p><\/blockquote>\n
Goforth further explained: \u201cIf the cryptoasset is truly decentralized so that there is no \u2018other\u2019 upon whom purchasers are relying, the Howey Test is not met.\u201d That is, the coin or token would not<\/em> be considered a security, as happened with Bitcoin (BTC) and Ether (ETH). \u201cIn the case of an asset like XRP, where the creator\/issuer owns the bulk of the asset, controls its distribution, and is primarily responsible for its utility and potential profitability, it is easy to see how purchasers could be relying on the creator\/issuer.\u201d<\/p>\n
Typically, SEC enforcement actions target issuers who are engaging in obviously fraudulent or corrupt behavior or target a specific activity they are hoping to dissuade, noted Wagster, adding: \u201cThe action against Ripple appears to target the promotional activity Ripple undertook when selling its tokens.\u201d<\/p>\n
\u201cRipple does not want to face the regulatory burdens of registering XRP as a security when Bitcoin and Ether appear to have escaped that fate,\u201d said Payne, adding: \u201cThe question of how similar XRP is to Bitcoin and Ether today \u2014 as opposed to when they were first created \u2014 and whether the court even views that comparison as the right one could make or break this case.\u201d<\/p>\n
Meanwhile, even if the court decides that XRP is unlike Bitcoin and Ether \u2014 and has to be registered in the U.S. as a security \u2014 \u201cthat does not necessarily make the XRP token worthless,\u201d suggested Goforth. \u201cThe real question would be what kind of final order the SEC might accept if it is clear that the court is going to find that XRP was sold as an investment and was, therefore, a security. If we analogize to SEC v. Kik\u201d (another case where tokens [e.g., Kin] were issued by a company), then:<\/p>\n
\u201cRipple might be permitted to continue operating with limitations on the right of the company and its founders to sell additional tokens. Just as Kik is required to notify the SEC of trades, a similar obligation might be imposed on Ripple and its current and former CEO.\u201d<\/p><\/blockquote>\n
\u201cOn the other hand, if the SEC insists on registration, it will be up to Ripple to decide if that makes financial sense. If it does, a registered token will actually have more<\/em> value and be more readily traded, so that could be a real win for investors,\u201d said Goforth.<\/p>\n
And if the SEC loses? Wagster told Cointelegraph: \u201cNo matter the outcome of the SEC\u2019s complaint against Ripple, the SEC will continue to be one of the primary regulators of cryptocurrency in the United States.\u201d <\/p>\n
The wheel of fortune rises and falls<\/h2>\n
Even if Ripple prevailed in round one, it hasn\u2019t won the match. As Wagster told Cointelegraph: \u201cThe U.S. District Court\u2019s recent rulings are certainly favorable to Ripple, but the game is far from over. The SEC tends to choose its cryptocurrency targets carefully.\u201d Moreover, he added: <\/p>\n
\u201cOnce the SEC decides to move forward with a high-profile enforcement action, it would be embarrassing for them to back down without some sort of victory. I expect them to continue to pursue their claims against Ripple with zeal.\u201d<\/p><\/blockquote>\n