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Ripple vs. SEC Was this ruling the knockout for the SEC?

 


Ripple and the US stock exchange supervisory authority SEC have been in a legal dispute for over a year. Not only (at least) 1.3 billion US dollars are at stake, but also a directional decision for the entire crypto space. Now the responsible judge rejected two crucial applications.

On December 22, 2020, Ripple Labs received an indictment from the US Securities and Exchange Commission. The charge was “illicit trading in unregistered securities”. Since then, the authorities have been at odds with Ripple Labs, the American technology company behind the XRP token. Now two more decisions have been made . On the one hand, the crypto company’s “Fair Notice” defense is upheld. On the other hand, Brad Garlinghouse, the CEO of Ripple Labs, and Chris Larsen, the former CEO, both had their requests dropped as individuals.


Ripple's rise and fall

In order to understand how big the dimension of the current decisions is, you have to take a look at the history of the dispute. When Ripple founded itself in 2012 and considered how they could place the so-called “NewCoin” on the American market, they got legal advice. This should help the developers in the question of how the design of the coin and Ripple’s business model could lead to “NewCoin” being a security according to the SEC definition. After hints from this legal advice about such concerns , Ripple changed the business model - and XRP was born. A cryptocurrency that, in the eyes of legal experts, would have had very little risk of being classified as problematic by the SEC.


According to various sources, Ripple was said to have been in contact with SEC employees several times up until 2018. In addition, some of the officials themselves invested in XRP , as reported by BTC-ECHO (a not entirely unimportant side note). Because if it had already been classified as a security at the time, the employees would not have been allowed to invest at all.


Finally, XRP was classified as a conditional security in January 2018. An official indictment from the securities supervisory authority followed in December 2020. The accusation is: unauthorized securities trading over a period of eight years.


Ripple's current defense is the fundamental question of why it did not receive a fair indication of the institution's concerns from the SEC in these eight years (between 2012 and 2020). In Ripple’s argument, they could have been informed at the respective meetings at any time about concerns about consumer protection and financial stability. In addition, the company emphasizes that it has already demonstrated in the past its willingness to adapt to the regulations in force.


According to the SEC's application to the judiciary, this line of defense should not be allowed to be pursued. But Judge Antalisa Torres denied the SEC's attempt to stop the process. The XRP community is celebrating this partial victory, and the SEC must now explain why it did not inform Ripple Labs of the concerns earlier. For many, this is the (temporary) victory in this process. Garlinghouse wrote on Twitter:



Are cryptocurrencies securities?

The reason why this argument plays such an important role for the crypto space is that if Ripple wins the case - and much of the community now assumes it does - this decision will become a crucial direction for any crypto company that wants to SEC now sued for past actions. There is also the question of whether cryptocurrencies can be classified as securities at all. Because only if they are, the SEC is even responsible for their legal status.


Judge Torres applied the criteria from the Howey Test in her recent decisions . Accordingly, a security contains a so-called participation agreement. This is defined by the US Supreme Court as a


Investment in the form of money in a well-known company with the credible expectation of future profits to be derived from the entrepreneurial or managerial efforts of others.


From this it follows that the allocation of securities requires a central authority that is responsible for the company and has a say in determining the price through its actions. Through these, the investors can expect to receive more money from their investment in the future.


The SEC's expert report for XRP and Ripple has now also checked these properties.


What are the odds for Ripple Labs?

The expert report comes to the conclusion via regression models that there is a significant connection between the announcements at Ripple Labs and the price of XRP. In the crypto community, on the other hand, there is a consensus that the XRP price is largely correlated with the Bitcoin price and depends far less on the organization in the background.


In addition, the SEC has already confirmed in the past that decentralized networks such as Bitcoin or Ethereum cannot be classified by the Howey test and are therefore not securities. Because here there would be no value proposition from a central organization (enterprise) to rake in profits in the future. Ripple sees itself in the same category. The goal of the company would never have been speculative investment trading, but to simplify online trading. In addition, the organizational structure would have been decentralized and Ripple Labs would not have been in direct contact with the investors. Instead, they would have primarily acquired the tokens via other trading venues.


Whether these arguments will be enough for Judge Torres to dismiss the SEC's charges remains to be seen in the coming weeks. Nevertheless, there is still the possibility of protracting the procedure via objections and appeals.

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