Behind the Scene：SEC vs. Ripple Lawsuit

2022-03-09, 03:30

[TL;DR]

With the evolution of cryptocurrencies, classifying digital assets as currency or securities has been the crux of the SEC's issue. Chief of which is the SEC vs. Ripple lawsuit filed in 2020 by the Securities and Exchange Commission against Ripples Lab Inc.

In 2015, the Justice Department had ruled the XRP as a cryptocurrency just like Bitcoin and Ethereum; however, on the 22nd of December in 2020, the SEC announced in a press release that they were suing Ripples Labs for raising about $1.3 billion through unregistered securities known as XRP. According to the SEC, the CEOs of Ripples Lab used returns from XRP sales to finance their business. The failure to register the security led to a lack of information on the path of retail investors.

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Experts point to a probable cause behind the lawsuit being the system of mining XRP. Unlike Bitcoin or Ethereum that utilized Proof-of-Work mining, XRP was not mined; 100 billion XRP were released into circulation, with Ripples holding 48 billion of it. The aftermath of the XRP vs. SEC lawsuit was XRP's value plunging by more than 75% and many cryptocurrency exchanges delisting XRP from their platforms.

Does the SEC have a Case Against Ripple?

In January 2018, XRP hit an all-time high of $3.29, it went through a few ups and downs, and by December 2020, it was trading at $0.6. However, after the XRP lawsuit hit, XRP plunged by more than 75%, and experts made predictions that XRP would become worthless. At the time of writing this article, XRP was trading over $0.70.

XRP Price from 2017 till Date

The plunge in XRP prices was reactionary due to the lawsuit and damning accusations. However, since filing the lawsuit, whether the SEC has a strong case against Ripple Labs remains unknown. There has been a lot of debate around the topic, mainly because most of SEC's arguments have been ambiguous. The SEC's defense has revolved around minting XRP, which according to the SEC, makes the coin security rather than a currency. Their argument closes because, unlike Ethereum and Bitcoin, which utilize a blockchain for minting, XRP was published with Ripples Lab owning 6.4 billion of it.

In an FXStreet article, some lawyers opine that the case would close in April 2022. After several conversations on the topic and arguments presented by both sides, the majority of the observers believe that Ripple will win the case. In a conversation between Digital Asset Investor (DAI) and John Deaton, a foremost cryptocurrency lawyer, he regarded the SEC's claim as "dead on arrival."

In the XRP lawsuit update, documents show that 60 days after filing the lawsuit, an XRP holder emailed the SEC seeking clarification on the status of XRP as a security. The SEC replied that they have been unable to clarify whether XRP is a security. Another evidence that helps Ripple in the XRP court case is a 2018 speech. William Hinman, the Director of Corporation Finance at the SEC, declared that ether, the token of Ethereum's blockchain, was not a security. According to a Decrypt post, the Ripple legal team aimed to quiz the SEC for evidence that led to that conclusion.

However, in another vein, a string of emails from the CEO of Ripple, Brad Garlinghouse, to Ripple employees score a strong point for the SEC. In the email, Garlinghouse noted that Ripple held 55 billion XRP in escrow to provide a predictable supply schedule for investors. Following the ruling of Judge Analisa Torres, the court unsealed the emails for public disclosure. Among the evidence presented to the judge are email exchanges between Ripple Chairman Chris Larsen and a Portuguese national, Carlos Martin, discussing XRP price dynamics. In an analysis on his YouTube vlog (Legal Briefs), Jeremy Hogan considered the pieces of evidence as being too weak to ruffle Ripple's claim. In his video, Hogan presented counterarguments that would weaken the claims of the SEC.

Judge Analisa Torres’s ruling

After Judge Torres's ruling announcement, XRP recorded a 25% surge in price trading as high as $0.9 on the 3rd of February. However, a weekend of profit-taking by investors caused the movement of 120 million XRP, causing the price to fall back to the region of $0.703.

XRP Lawsuit Update

As the case concludes, varying predictions have come up, most favoring Ripple. Experts consider the matter consequential in the cryptocurrency world, irrespective of the ruling. Experts at Hart David Carson believe that the verdict will determine the regulatory oversight that cryptocurrencies will receive in the US.

In the concluding parts of the case, it has been decided that a settlement will suffice. According to Jeremy Hogan, a settlement discussion broke down in the past, and he opined that the subsequent settlement would be mediation. The mediation will be hosted by Judge Sarah Netburn, who has overseen the case for over a year.

Conclusively, the SEC vs. Ripple Lawsuit will be a factor in determining the direction cryptocurrency regulation will take in the future.

Author：Gate.io Researcher：M. Olatunji
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