Understanding Ripple’s legal battle against the SEC

Update: Ripple has emerged victorious in the legal battle against the SEC. This article has been updated to reflect this significant development.

Since December 2020 Ripple Labs, Inc, the company behind the cryptocurrency token XRP, has been embroiled in a lawsuit with the U.S. Securities and Exchange Commission↗︎ (SEC). The SEC alleged that Ripple and its executives, CEO Brad Garlinghouse and co-founder Chris Larsen, sold XRP to investors without registering it as a security, which is a violation of U.S. securities laws.

Why did the SEC take Ripple to court?

The SEC claimed that Ripple raised over $1.3 billion through the sale of XRP since 2013 and that the company engaged in ongoing illegal sales of XRP to fund its operations and benefit its founders. Ripple, on the other hand, maintained that XRP is a cryptocurrency, not a security and that the SEC’s allegations were baseless.

Ripple argued that XRP is used to facilitate cross-border transactions between banks and other financial institutions, and it is not an investment contract. Therefore, it should not be considered a security. Ripple and its executives remained steadfast in their view that XRP is a cryptocurrency and should be treated as such.

Ripple wins against the SEC

On July 13, 2023, the United States District Court in Southern New York ruled that Ripple’s XRP token should not be considered a security and that Ripple did not break federal securities laws by selling XRP on public exchanges.

The US Securities and Exchange Commission (SEC) Chair, Gary Gensler, expressed disappointment with the judge’s ruling saying it dealt a significant blow to the SEC’s efforts to regulate the cryptocurrency sector. Gensler stated that the agency was assessing the decision but was pleased with the judge’s determination that Ripple’s direct sale of XRP tokens to sophisticated investors was improper.

Following the ruling, U.S. Judge Sarah Netburn has instructed the SEC and Ripple to collaborate and identify three mutually convenient days for a potential settlement conference. This is the latest development.

Ripple was confident they could win against the SEC

Ripple execs were anticipating a win against the SEC. Ripple CEO Brad Garlinghouse had revealed that he was confident that the “facts and the law” were on their side, making it unlikely for the SEC to prevail in the lawsuit.

The court ruling could have had far-reaching consequences for the crypto industry. If the court decided to classify XRP as a security, it could have potentially led to more regulations and further lawsuits for cryptocurrency firms.

Furthermore, if the court ruled in favour of the SEC, Ripple has considered moving offshore to avoid the regulatory repercussions that come with being classified as a security.

The SEC determines whether a financial product is a security or not using the Howey Test, which was introduced in the 1920s. The test states that a financial product is considered a security if it involves “investment of money, in a common enterprise, with a reasonable expectation of profits, to be derived from the efforts of others.”

Ripple’s chief legal officer, Stuart Alderoty, argued that XRP does not meet any of the Howey criteria and there is “no common enterprise” or group undertaking whose efforts affect the cryptocurrency’s value.

In the event that the court had ruled in favour of the SEC, cryptocurrencies that are deemed unregistered securities would have been subject to fines, and cryptocurrency projects would have to file with the SEC to await registration as a security before operating in the US.

XRP price prediction

XRP pumped 80% following the news, reaching $0.97, a far cry from the predicted $10.

I believe investors remain on edge and true price discovery and market sentiment are likely to become clearer once the trial reaches its final conclusion.

XRP’s all-time high remains at $3.84.

SEC VS Ripple latest developments

Latest case developments from external news sources: