Since the 22nd of December 2020, the SEC and Ripple have been engaged in a legal confrontation that has ramifications for the entire crypto industry.
The lawsuit concerns the digital asset XRP that is issued by Ripple. Currently ranked number 7 by market cap, XRP is one of the biggest crypto assets in the space. However, because of the lawsuit, it is not listed on many major exchanges, including coinbase.
The lawsuit can be tricky to understand so today, we’re going to look at exactly what the SEC alleges and how it might impact the wider crypto community.
The SEC’s Case
The case deals with whether or not XRP should be treated as a security. Securities are governed by a much tighter set of regulations than a simple cryptocurrency so the distinction is significant.
Between 2013 and 2020, Ripple Labs raised $1.3 billion selling XRP. Now the SEC alleges that this constitutes illegally-raised capital because XRP was not a registered security. In other words, Ripple was able to offer XRP to investors across the globe without being subjected to any regulations that they normally would.
In addition to that, the SEC also claims that by transacting in XRP, Ripple was further able to push sales of their token.
The SEC believes that because all of the XRP was minted at once and then sold by Ripple, it constitutes a security. This is in contrast to Bitcoin and Ethereum which can be minted by anyone who runs a node in the network. Bitcoin and Ethereum are decentralised. The creation of them is not controlled by one entity like it was for XRP.
In the words of the SEC’s own website, “According to the complaint, in addition to structuring and promoting the XRP sales used to finance the company’s business, Larsen and Garlinghouse also effected personal unregistered sales of XRP totalling approximately $600 million.
The complaint alleges that the defendants failed to register their offers and sales of XRP or satisfy any exemption from registration, in violation of the registration provisions of the federal securities laws,”
The Case For The Defense
The definition of a security though, is not as straightforward as the SEC seem to be suggesting. Yes, Ripple Labs raised a lot of capital through sales of XRP. However, holding XRP does not grant any sort of ownership over Ripple Labs. It is not like a stock or other traditional securities that can be used to gain a controlling stake in a company.
XRP is a medium of exchange, pure and simple, and it has been used for this purpose extensively since it was launched. Because of the centralised nature of the network, its speed and price make it one of the most efficient crypto networks to transact with.
Whether the asset is mined by validators or pre-mined and sold by one institution is irrelevant according to Ripple. Essentially, XRP as a network, is a product that Ripple Lab has launched. This is a currency that currently sees over 1.3 million transactions a day. It was never sold as part of an investment contract.
The Larger Implications
The reason this matters so much is that this is clearly a gray area in terms of how cryptocurrencies are allowed to operate. The implications for other projects are pretty apparent.
Currently, the SEC is trying to prevent documents written by former official Bill Hinman from being entered into evidence. In the documents, Hinman suggests that Ethereum is not a security. Ripple Labs wants to use this statement as an example of how crypto assets should be seen as currencies rather than securities.
The fact the SEC wants to keep these documents out of court shows that even a token as well established as Ethereum might also run afoul of the SEC in the future.
Ultimately, this is a gray area that needs to be resolved. Ripple’s business has been impacted by this case but they have been able to operate across the world in countries with much more clearly defined regulatory framework for digital assets such as Singapore, Japan, the UK and Switzerland.
The United States needs to catch up to these countries. Not just for Ripple but for the sake of crypto at large. As the largest economy in the world, a more clearly defined set of regulations would create more confidence in a massive institutional investment
