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XRP: simplified precis of SEC battle

Ripple Labs is fighting a court battle with the SEC that could set the legal precedent that cryptocurrencies traded in the US are indeed securities.

xrp Source: Bloomberg

The regulatory battle between the US SEC and XRP token creator Ripple Labs has been brewing since 2020, when Chair Gary Gensler accused the company of raising $1.3 billion through an unregistered digital asset security offering.

Fresh from his victory over LBRY, the case could set a precedent that most cryptocurrencies are securities and fall entirely under the purview of the regulator; a position that has been argued over for a decade, and which opponents believe could see blockchain technological advancements move out of the US.

This is because an SEC victory could severely limit the ability of crypto companies to grow, as they often launch new tokens to generate cash. If this were to become a securities liability, then new crypto launches in the US could become too risky. However, regulation could be the key to mass adoption that has so far been missing as a key cryptocurrency requirement.

Of course, many have called for the SEC to step away from perceived ‘bad actors’ in the crypto space, arguing that having warned retail investors of the risks, that its duty to the public is done. However, there are several problems with this approach.

For example, the US will almost certainly want to retain its lead in the crypto development space given the power of blockchain tech, and further, when the next crypto bull market comes, it could carry contagion risks for the wider financial sector if the alternative investment becomes mainstream.

What is XRP’s use case?

XRP has been designed by Ripple Labs to be the most practical cryptocurrency for applications across the financial services space, with use cases including cross-border payments, crypto liquidity, and Central Bank Digital Currencies.

The crypto is down to 0.33p today but was worth as much as 1.19p in April 2021, having suffered not just from regulatory pressures, but the same economic pressures and tighter monetary policy that have affected the wider crypto sphere.

Ripple v the SEC

As previously stated, the SEC is accusing Ripple of illegally raising money by issuing XRP as an unregistered security, while Ripple counters that XRP is not a security and therefore is not a concern of the SEC. Importantly, the regulator argues that Ripple has cost retail traders at least $15 billion.

Following on from the LBRY case, and wider SEC comments that Ethereum also now functions as a security after the Merge by dint of the ability to stake tokens for ETHER rewards, the outcome of the Ripple case could set a precedent that all crypto — despite their decentralized natures — should be regulated by the SEC. This could rapidly become difficult to legislate as many cryptocurrency nodes are hosted across multiple countries, and it is difficult to see how the SEC could regulate any one altcoin if it is hosted outside the US.

One solution might be to regulate exchanges more strongly — an idea gaining popularity after the collapse of Voyager, Celsius, and FTX. According to a recent SEC press release, Genesis and Gemini are facing questions for allegedly selling unregistered securities in connection with a high-yield product offered to depositors. Accordingly, the SEC argues that Gemini's Earn program, supported by Genesis' lending operations, falls under its jurisdiction.

XRP legal case in brief

In summary, the SEC is attempting to get a legal ruling stating that the cryptocurrency developer’s altcoin functions as a security. While XRP runs on a consensus protocol rather than a proof-of-stake blockchain like Ethereum now does, an SEC win could set the precedent that all altcoins that do not utilise proof-of-work protocols (like Bitcoin) are securities.

The importance of the case has seen more than a dozen amici curiae — a US-specific legal procedure which allows entities not directly involved in a lawsuit to provide input, testify, and show moral support — filed in support of Ripple, including Coinbase which alleged that the SEC forced US-based exchanges to delist the altcoin, crashing its value, and was therefore itself the primary reason for the retail client losses.
Notably, Coinbase argues that ‘in the absence of a regulatory framework governing digital assets, Coinbase believes that parties like Ripple must be permitted to pursue fair notice defences.’ Further, the US’s largest exchange thinks that the SEC has subjected Ripple to more ‘extensive enforcement scrutiny’ than other firms with similar offerings.

It’s also worth noting that Coinbase also believes that ‘by suing sellers of XRP tokens after making public statements signalling those transactions were lawful,’ the SEC has lost sight of the ‘bedrock principle’ that sellers are legally allowed to do so within registered securities exchanges.

One contentious aspect of the case is the court’s ability to seal or unseal documents. For example, the SEC was forced to release former SEC official William Hinman’s documents to Ripple after no less than six court judgments found against it — a key win as Ripple believes he made a speech stating that Bitcoin and Ethereum are not securities.

Similarly, Ripple has filed a motion opposing a filing by one ‘Investment Banker Declarant’ who has previously submitted a declaration supporting the SEC. The declarant wishes to keep his name, position, and employer private, and argues being forced to reveal these details could hinder future investigations as witnesses might fail to declare information if they cannot rely on confidentiality. Of course, Ripple supporters feel that this confidentiality is a bridge too far designed to keep details out of the public view.

Both parties are waiting for the final judgment date, but Ripple COE Brad Garlinghouse believes the case could conclude by summer and feels ‘very good about where we are relative to the law and the facts.’

A positive outcome for Ripple could see XRP soar, but with the case in the air, this is far from guaranteed.

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