The SEC vs. Ripple lawsuit: Everything you need to know

What is the SEC lawsuit against Ripple?

A business named Ripple Labs first appeared on the fintech landscape in 2012 with a reassuring promise to provide financial institutions with low-cost and speedy clearance of cross-border money transfers. To make it happen, the business created the RippleNet network on which transactions in the form of a cryptocurrency called XRP can be settled and cleared in real-time.

Over several years, however, XRP grew outside of the stated application. The company’s founders used XRP as digital assets to raise funds in 2013. As a result, the United States Securities and Exchange Commission (SEC) in the United States filed suit against Ripple Labs and its current and previous CEOs in 2020. But, why did the SEC sue Ripple? 

The SEC alleged that the executives held an initial public offering (IPO) of XRP, which was unregistered security at the time of raising capital. According to the complaint, Ripple raised funds by selling XRP tokens in unregistered security offerings to investors in the United States and around the world. Additionally, Ripple offered billions of XRP in exchange for non-cash services like market-making and labor. 

According to the lawsuit, Chris Larsen, Ripple Lab’s co-founder and former CEO, and Brad Garlinghouse, Ripple’s current CEO, affected personal unregistered XRP transactions totaling about $600 million and structuring and marketing the XRP sales utilized to support the company’s business. Moreover, the defendants failed to register their XRP offers and sales or meet any exemption from registration in violation of the federal securities laws’ registration restrictions.

In this article, we will discuss Ripple regulation, Ripple’s case against the SEC and the SEC’s decision for Ripple.

What are the SEC’s claims in Ripple’s legal brawl?

The SEC claimed that XRP is a security. In general, a security is a traded financial instrument representing ownership in a corporation or similar entity but has no utility. For instance, shares are commonly defined as securities by publicly listed firms in order to obtain finance.

Since XRP tokens were used to fund Ripple’s platform, which facilitates money transfers for retailers, a civil action was filed at the end of December 2020. The sales of XRP also enriched the platform’s management. However, it is essential to note that as per the SEC, Bitcoin (BTC) is not a security. The legal definition of securities can be read here.

The United States SEC vs. Howey test was a landmark Supreme Court case in 1946, which aids in determining whether a transaction falls within the Securities Act of 1933’s definition of an investment contract.

According to the Howey test, the investor’s control over the profit is a critical factor in determining whether or not an investment contract is a security. It is usually considered a security if the investors have no influence over the asset. So, did XRP comply with the requirements of the Howey test?

According to the SEC requirements, securities must be registered with the SEC and some financial information must be publicly reported. The purpose is to protect investors’ interests while combating fraud. The SEC determined that XRP satisfied the Howey test’s requirements because

Ripple’s response to the XRP court case

Instead of going to trial, the SEC settles most of its lawsuits. Individual crypto companies submit to the SEC’s demands and pay penalties in order to be released. Unlike many others, Ripple went all the way and engaged in a legal brawl.

Ripple lawyers claimed that the SEC never warned nor gave any notice to the organization. The U.S. regulator also accepted that Ripple wasn’t notified that XRP could be classified as a security.

As a result, Ripple believed the SEC was biased in applying the security concept to virtual currencies like XRP. If this is found to be true, the commission’s authority will be weakened, not to mention the credibility of its argument.

Ripple has specifically mentioned some of the links SEC members have had with other crypto platforms, namely Ethereum. While there is currently no proof of these linkages, the commission gave Ethereum a pass on securities legislation, saying that it is operating in a decentralized manner all while suing XRP, which seemed suspicious.

Ripple lawsuit update: The timeline of Ripple vs. SEC fistfight

The question of when the Ripple vs. SEC lawsuit will be resolved has been lingering for months, as the blockchain company risks missing out on business prospects. At the same time, the case is pending and XRP holders wait for the digital asset to be relisted. 

The series of events during the Ripple vs. SEC lawsuit are outlined below:

• December 21, 2020: The SEC filed a lawsuit against two executives of Ripple Labs and the company itself. Instead of meeting the SEC’s demands, Garlinghouse declared to defend themselves in the XRP court case.

• December 28, 2020: Coinbase announced delisting the XRP token from the exchange.

• March 3, 2021: Larsen and Garlinghouse sent letters to the U.S. District Court Southern District of New York Magistrate arguing that the SEC lacked fair notice.

• March 8, 2021: The SEC responded by requesting the judge for a hearing immediately. 

• March 22, 2021: The SEC was told that the XRP token has a currency value and utility, distinguishing it from BTC and ETH by Judge Netburn.

• April 13, 2021: The Token Safe Harbor Proposal 2.0 was published by Hester M. Peirce (SEC Commissioner) to offer a three-year grace period for developers to understand their participation in the decentralized networks concerning exemption from the securities law.

• June 14, 2021: The court extended the SEC’s deadline for disclosing its internal crypto trading policies to August 31, 2021.

• August 31, 2021: The SEC must disclose its internal crypto trading policies on this day.

• October 15, 2021: Expert discovery deadline for gathering opinions from experts in the fields of cryptography and securities.

• January 24, 2022: Netburn has granted the SEC until Feb. 17 to appeal her earlier decision that the defendant Ripple Labs provide over some sensitive government documents in the SEC’s case alleging that the XRP coin is unregistered security.

Is the XRP lawsuit over?

Proponents feel that the court rulings have been in Ripple’s favor so far. Attorney Jeremy Hogan, an XRP2 proponent and U.S. legal counsel, expects that the case will be resolved soon. Garlinghouse believes the SEC case will be resolved by April 2022. 

On February 23, 2022, the letter was submitted to the court of law, stating that the class-action case would begin on August 26, 2022, but that the parties have agreed to start on November 18, 2022, to prepare for the factual and legal questions.

It's difficult to determine who will win the SEC vs. Ripple case. In terms of procedural considerations, both Ripple Labs and the SEC appear to have a pinch of success in their own way. For instance, Ripple successfully forced the SEC to hand up papers, while the SEC was successful in obtaining a postponement. 

The Ripple vs. SEC litigation conclusions concern more than simply the Ripple community. Aside from XRP holders, the case can send a powerful message to everyone participating in the crypto industry including the exchanges, investors and traders. Depending on the country, the lawsuit’s decision could have varied consequences. 

The United States, on the other hand, would have a unique status for crypto with the final result of the case. The crypto community is mainly upbeat about the Ripple vs. SEC litigation, with most people believing Ripple Labs has a better chance of winning than the SEC. Nonetheless, existing XRP holders are most concerned about what might happen to the XRP token price if Ripple loses the case.

For the time being, it’s a deadlock. But, if history is any guide, the SEC is in for a difficult task. To date, no company has regulated their crypto tokens as securities, as required by the SEC.