OP-ED

SEC vs. Ripple: What we know so far

TL;DR Breakdown

  • SEC accuses Ripple of selling unregistered security in the guise of crypto token.
  • XRP’s identity issue comes to the fore in this impending lawsuit.
  • Ripple has denied any wrongdoing saying its token is just like Bitcoin and Ethereum.
  • Crypto community shares divergent views on what the SEC lawsuit mean to the industry.

Towards the end of last year, top US financial regulator, the Securities and Exchange Commission (SEC), shocked the crypto community when it announced that it would be suing Ripple Labs, the famous parent company of XRP token. The regulator also claimed it would be be suing the firm’s Chief Executive Officer and its co-founder, Brad Garlinghouse and Chris Larsen.

According to the SEC, Ripple was selling unregistered securities in the guise of a crypto token to investors. The SEC also alleged that the firm depended on selling this token to cover its business operations and that the asset was also being exchanged for non-monetary consideration. The regulators also pointed out that Garlinghouse and Larsen personally sold around $600 million worth of XRP to investors.

To put this in simple terms, the financial regulator accuses Ripple of contravening its regulations that stipulates that all Security assets should be appropriately registered and authorized by the commission. And its prayer to the court would be for the crypto company to return the over $1 billion generated from the token sales plus facing other penalties.

Ripple has, however, denied any wrongdoing. In strong terms, the company has said that its XRP token is just like every other crypto asset like Bitcoin, Ethereum, and others. And that the regulations of the authorities do not apply to it. The firm also stated that the SEC was also clearly out of tune with the crypto industry as other regulators in other countries like Japan and even the United Kingdom do not classify its asset as a security. 

The San-Francisco based company has also reportedly said the lawsuit is more of a political move than any serious policy issue as its asset has similar functions to Bitcoin and Ethereum in particular. However, those tokens are not considered to be security. For this reason, the firm has remained dogged and has said it would stand up against the “bullying” of the authorities.

But despite the firm’s positive outlook towards the case, the value of its token nosedived sharply immediately word got out about the litigation. Crypto exchanges also began delisting the asset as they cited the regulatory squabble over the asset as why their decisions were being made.

Regardless of this, one thing we can deduce is that at the end of the court process, we would have a definitive answer to the question of whether XRP is a stock or crypto asset.

Why is this lawsuit necessary?

One issue that has plagued the XRP token overtime is its issue of identity. Its parent company’s activities with other financial institutions, banks, and the almost seamless relationships between the token and the firm have always baffled many.

While Ripple has established itself as a crypto payment company over the years, the firm has also severally said that financial institutions like a bank could use the token to move billions if not trillions in international transactions. This has made the company seek partnerships with financial institutions to use its products for their services. 

But, unlike other cryptocurrencies, Ripple’s close relationships with traditional banks and the lack of identity for its token have finally come to the forefront.

This lawsuit not only determines the future of XRP but will also affect the cryptocurrencies that share similarities with XRP. If the SEC should win the case and XRP is declared a security, it will set a legal precedent that will extend the Howey test scope and affect the crypto market. 

For those who are not familiar with the Howey test, this test focuses on a single question, whether the monetary value of an asset that is being invested in depends on a third party effort. While this test is simple when applied to a stock, it is problematic when it comes to cryptocurrencies.

A trait that stands cryptocurrencies apart is decentralization, and while XRP is more centralized, experts have argued it is decentralized enough to be considered a cryptocurrency like Bitcoin.

Can Ripple win the SEC lawsuit?

The multi-million question many crypto enthusiasts and investors in Ripple’s token would be asking is “if the company can take on the authorities and win the case?” This, no doubt, would have a far-reaching effect on the overall crypto industry in the United States.

One thing needs to be clear here. We need to realize that there are two fundamental accusations in the SEC lawsuit, and it is the interrelation of these accusations that will determine how the case unfolds. The first accusation is that XRP is an unregistered security, which constitutes a significant violation of the federal securities laws; the other accusation is that Ripple and its two foremost executives enriched themselves through the sales of the token.

Some analysts think there is enough evidence to show that Ripple, Garlinghouse, and Larsen engaged in practices that were not in line with fair business and could lead to penalties. One such proponent is Dr. Craig Wright, who wrote an article where he said he had advised Coinbase about the token and declared himself ready to testify in court. If this school of thought is right, it means Ripple is liable and could pay a penalty this, however, depends on whether XRP is found to be a security or not. 

Another school of thought with a contrary opinion has members like Charles Hoskinson, the founder of Cardano who believes XRP cannot be considered security. According to him, the asset might look like one at first glance, but because it will continue to exist no matter what happens to Ripple, Garlinghouse, and Larsen, it cannot be considered to be one.

Coupled with this is the opinion of other financial authorities like the Financial Crimes Enforcement Network (FinCEN) and the US Department of Justice, and other international regulators who have considered XRP to be a virtual currency. The company also claims to possess enough data that shows that Ripple, Garlinghouse, and Larsen’s selling behavior and efforts were too minimal to impact the token’s price.

However, other experts have sat on the fence and they are quick to point out that the lawsuit’s most likely outcome would be a settlement. This was the view of Jeremy Hogan, an attorney with Hogan and Hogan law firm, who pointed out that with the recent presidential appointments to SEC, US Treasury, and OCC, the new appointees will clear the grey areas in crypto regulations in the US, and this will work to the benefit of the accused.

Differences between XRP and other crypto assets

Ripple’s XRP does not have the fame or value of Bitcoin, but it has proven itself to be a great cryptocurrency too. Currently, it ranks among the top 10 cryptocurrencies by market cap. But it has some features that make it different from every other crypto asset. Some of them are:

It is not based on blockchain

XRP uses the Ripple Protocol consensus algorithm to verify transactions instead of a blockchain used by Bitcoin and the likes.

Centralization

While most cryptocurrencies are decentralized, XRP is not based on the blockchain, which means it is centralized and controlled by Ripple, the parent company. This is what makes it possible to sell the services to banks.

No Mining

XRP does not also have a mining process like most cryptocurrencies. Instead, it is issued by Ripple who created 100 billion coins and released the coins periodically. Less than 50 billion coins are in circulation presently.

What the crypto community says about the SEC Lawsuit

The lawsuit has generated some divergent opinions from the crypto community. While some crypto community members are standing staunchly behind one of their own against the financial regulator. Some others have shown some level of pessimism and some restraints in their views about the law case.

According to Dr. Tomasz R. Smuz, a Blockchain and crypto business consultant, he says the litigation between SEC and Ripple is only a US thing, meaning the case’s outcome will have little to no effect on the general crypto market. In his opinion, Asia is the leading crypto market, and what the SEC is doing will only affect individual US projects. His view is in line with Ripple’s earlier threats to move its headquarters out of the States because of the regulatory uncertainty that clouds the country’s crypto space.

Another crypto consultant, Jordan Finneseth, believes that SEC is seeking to make an example of Ripple, and this lawsuit shows the risks of an unregistered token sale. However, he predicts that this would end in a settlement just like what happened with Block. One and EOS. He noted that if XRP is considered a security at the end of the day, it could become another traditional investing option with listings on traditional brokerages.

Richard Trummer, an ICO Advisor with BITOZZ, Cryotoknowmics, and other platforms, considers this lawsuit to be disastrous for XRP. He cited the decline in the value of the XRP and the subsequent delisting by various exchanges to be bad for the token’s image with investors. He also said that he thinks the SEC has a solid case against the firm given that the executives of the firm were able to profit from the token sales and the fact that Ripple used the sales to finance their business operations. He concluded by saying that he considers the asset to be problematic. 

Venture Partner at Blockchain Founders Fund, Warren Lorenz, posits that the lawsuit was inevitable due to the asset’s market cap size and its centralization feature. He also states that while the case is still about the sale of an unregistered security, fraud might become a severe issue with more discovery.

How the asset has performed since the litigation

A common saying in the crypto space is that previous price performance does not necessarily indicate or predict crypto assets’ future performance.

This is particularly true for XRP, which has been below a dollar category over the years. Until 2017, it was barely above $0.01 but soon increased, first reaching $0.05 by April, and by May, it was $0.25. During the crypto bull run of late 2017 and early 2018, XRP price peaked at $3.84. its value soon dropped, and by 2019, it was about $0.30. 

XRP had not passed the $0.50 since then. The token’s value suffered immediately it became imminent that a lawsuit was in the offing as many previous holders began to dispose the coin. And with exchanges also suspending or outrightly delisting the asset, there was considerable fear among investors about the asset’s future. The token lost its position on the Coinmarketcap ranking to another crypto asset before regaining then losing it to Cardano. Presently, it ranks fifth on the log of the largest crypto assets by market cap.

One of the reasons for its price rally is the current wave of interest in the crypto industry fueled mainly by WallStreetBets traders who took a sudden first-time interest in the crypto industry. This pumped the value of the asset higher as the price of other crypto coins also rose.

Some analysts have given the asset optimistic price predictions for the coming years. Some have predicted that it will be worth about $200 to $300 by 2030 if its mass adoption continues, and others have had a modest forecast. Moody, the Rating Agency, predicts that XRP could pass $2 in 2021, and Crypetrieum predicts that it would be worth between $17 to $20 by 2030. WalletInvestor predicts the future value of XRP by 2025 to be around $2.32, and Blockoney considers the possibility of XRP hitting $13.0576 by 2030.

Would it make sense to Invest in XRP now?

We all know that litigation is imminent between the authorities and the San Francisco-based crypto company. However, investors are still out there wondering whether to brave the odds and invest in this asset or strike it off their investment options. The truth is any investor looking to invest in the industry needs to perform his analysis before jumping the gun.

One of the most significant selling points of XRP is the speed of its technology and low cost of transactions. It charges below $0.01 per transaction and can process up to 1500 transactions within a second, which is far ahead of the leading crypto asset. This is why it has enjoyed some institutional backing with financial institutions like JP Morgan, Kuwait Finance House, Bank of America, Santander, Moneygram, and others adopting RippleNet and other Ripple products to facilitate their services.

However, a die-hard crypto enthusiast might have issues with its centralization, which makes it very similar to conventional financial institutions. Plus, the parent company’s somewhat close cooperation and partnership with other financial institutions like those stated above. This might dissuade some from investing in the asset.

The company has addressed these issues and says it holds the coin for valid reasons and ensures that the supply of XRP does not go beyond what is necessary so that its value is not affected in the market. On the issue of centralization, Ripple initiated its decentralization strategy in 2017, and intends to decentralize the XRP ledger beyond what Bitcoin has.

So, for anyone wishing to invest in XRP or who has already invested, it is not possible to ignore this lawsuit and its outcome. It is also essential to study market trends and check different price forecasts to see if XRP fits the bill for a good investment.

Conclusion

With all of these diverse opinions on the case and the fate of XRP to be determined in the coming week, noone knows what the future holds for the asset.

However, Brad Garlinghouse, the firm’s CEO, has given an insight into what the company could do if the asset is declared a security. The moment XRP is declared a security, US citizens and companies trading the crypto will need a broker-dealer license. But with over 90% of RippleNet users outside of the United States and no other primary economic market considers XRP as a security, it appears that the US will be alone in such a decision.

This means that whatever decision the court makes would only majorly affect the crypto asset in the United States and not anywhere else.

This post was last modified on February 9, 2021 7:03 am

Bruno Johnson

Bruno loves the crypto industry. He is a believer in the transformative power Bitcoin and Blockchain industry holds. He is interested in sharing knowledge and ideas. When he is not writing, he is looking to meet new people and trying out new things.

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