XRP is one of the leading cryptocurrencies in the market. Ripple, commonly known as the XRP, has been one of the most performant cryptocurrencies. The token served an excellent purpose of providing people with a safe and efficient way to send funds across borders.
Over the years, XRP has overcome many market barriers and fluctuations. But recently, Ripple ran into trouble with the SEC filing a lawsuit against the fintech company. The lawsuit has been going on for almost two years, and yet many people have some confusion about the entire ordeal. So this article will walk you through all the lawsuit details and help you better understand these complexities.
So What’s The Lawsuit All About?
The launch of Bitcoin in 2009 opened up many opportunities in the fintech sector. The market had more potential, and new entrepreneurs were set to make the most of this opportunity. Ripple Labs was one of those businesses that decided to seize this opportunity in 2012.
They set up this business with a noble intent to simplify and enhance the efficiency of cross-border transactions. This led to the creation of the RippleNet network with its native currency, XRP. The business soon became a hit with its offerings enabling it to grow at an unmatched pace over the years.
In 2013, the company decided to raise funds with its digital currency XRP. Things went on fine for years until 2020, when the United States Securities and Exchange Commission (SEC) filed a lawsuit against Ripple Labs and its current CEO. But what just happened after 8 long years of smooth sailing operations?
The SEC alleged that Ripple Labs raised funds with its XRP, which was unregistered security in 2013. Besides, there are allegations that Ripple offered billions of XRP in exchange for non-cash services such as labor and market making.
The lawsuit further states that Ripple’s former CEO and co-founder, Chris Larsen, along with the current CEO, Brad Garlinhouse affected XRP transactions worth $600 million as personal unregistered XRP transactions. The lawsuit also alleges the duo structured and marketed the sales of XRP tokens to support their business. Additionally, both defendants failed in their XRP sales or offer while failing to qualify for an exemption under the law.
What Is SEC’s Side Of Story?
Starting with the SEC, which claims that XRP is a security with no utility but can be traded as an instrument representing ownership of an entity. But the catch here is that XRP funds the Ripple platform that facilitates transactions for retailers. The sale of this token has benefited the entity’s management, resulting in the filing of a civil action at the end of December 2020.
To spice things up a bit more, the SEC does not consider Bitcoin (BTC) to be a security. Why? Feel free to read the definition of securities here to better understand this situation.
Now flashback time! The United States SEC vs. Howey tests was a landmark Supreme Court case in 1946. The case basically paints a clearer picture of a transaction that falls under the Securities Act of 1933’s definition of an investment contract.
The Howey test makes it clear the investor’s control over the profit is key to determining if an investment contract is a security. It is generally considered a security if investors have no control over the profit. So, where does that leave XRP?
The SEC requires securities to be registered with the authority and disclose some financial records. This is important to ensure the safety of the investors and combat any fraudulent practices. But SEC claims that Ripple failed to meet these requirements for three primary reasons:
- Ripple Labs sold XRP worth $1.38 billion
- Investors bought these tokens with a false presumption that they were investing in a joint venture.
- Investors believed that XRP prices would go up as Ripple manipulated them with marketing and supply manipulation.
So What Does Ripple Lab Have To Say?
Lawsuits are a common ordeal for the crypto industry, and most do not bother to deal with them. Instead, they pay off the fine and submit to SEC’s demand. But that was not going to be the case with Ripple.
Ripple claims that the SEC failed to warn them with any prior notice, and the U.S. Regulator also accepted that Ripple was not notified about XRP being classified as securities.
Ripple is claiming that the SEC is taking a biased stand in applying the concept of security to virtual currencies such as XRP. If this turns out to be true, the SEC’s authority and credibility will suffer detrimental consequences.
Ripple further bolstered its argument with allegations that SEC officials have secret links with other crypto platforms like Ethereum. They believe that Ethereum got a free pass on these legislations. Needless to say, this raised a lot of fingers against the SEC’s operating style, fueling even more suspicion.
The Timeline Of The Lawsuit
The entire series of events in the Ripple vs. SEC lawsuit started on 21st December 2020, with lawsuits filed against Ripple Labs and two of its executives. But contradicting popular conventions, Ripple’s executive Garlinghouse decided to defend themselves in court.
By 28th December 2020, Blockchain Gossips announced the delisting of XRP tokens from the exchange. On 3rd March 2021, the executives from Ripple sent a letter to the court arguing the SEC lacked fair notice. The SEC promptly requested a hearing on 8th March 2021.
On 22nd March 2021, Judge Netburn told SEC that XRP tokens have utility and currency value, differentiating them from other cryptos such as ETH and BTC. This was followed by the publication of the Token Safe Harbor Proposal 2.0 on 13th April 2021. With this, developers were allotted a three years grace period for understanding exemptions from the security laws.
On 14th June 2021, the court gave SEC an extension in the deadline for disclosing crypto trading policies on 31st August 2021. SEC adhered to this deadline and disclosed all that was asked for. 15th October 2021 was set as a deadline to gather opinions from experts in the sphere.
On 24th January 2022, Judge Netburn granted SEC till 17th February 2022 to appeal the earlier decision that defendant Ripple Labs provided over some sensitive documents in the SEC’s case, alleging that XRP is an unregistered security.
Conclusion: What Now?
Most proponents are of the view the court rulings have been in favor of Ripple. But there was further delay with a letter submitted on 26th February 2022 stating the class action case would begin on 26th August 2022. But both parties have decided to buy more time to gather factual and legal questions, ultimately pushing the date further to 18th November 2022.
As of now, it is not possible which party will emerge victorious on the other side of the tunnel. Hence it is fair to say the case is in a deadlock at the moment, and only time and the wisdom of judges will bring this to a fair conclusion.