Ripple vs SEC: A Comprehensive Overview

The chatter about Ripple's partial victory in its seemingly perpetual legal battle with the SEC continues, especially as SEC commissioner Gary Gensler expressed dissatisfaction with the district court's decision on Monday.

"We appreciate the court's decision, which highlights the need for investor protection, particularly for institutional investors,\" Gensler stated during a luncheon at the National Press Club on Monday. \"While we are disheartened by their stance on retail investors, we are still evaluating that perspective.\"

The extended legal dispute between Ripple and the SEC has become a crucial point of interest in the cryptocurrency realm, capturing attention from investors, fans, and regulatory agencies alike. Before last week's ruling, anticipation was high for a favorable outcome, adding an element of suspense and importance to the ongoing legal saga.

What is Ripple?

Ripple Labs, or simply Ripple, is a tech firm devoted to creating blockchain innovations aimed at making international payments and transfers quicker and more streamlined. The company is behind the XRP Ledger, a decentralized blockchain system that facilitates affordable and instantaneous global transactions. Ripple also created the cryptocurrency XRP.

Founded in 2012 by Chris Larsen and Jed McCaleb, Ripple has made waves in the fintech field. Larsen, a known name in the sector, previously co-founded platforms like E-Loan and Prosper Marketplace. McCaleb gained fame for launching one of the early Bitcoin exchanges, Mt. Gox, in 2010. Unfortunately, that exchange was shut down in 2014 due to severe security flaws, which resulted in considerable losses for customers. McCaleb was Ripple's CTO until 2013.

Ripple’s legal issues with the SEC

In December 2020, the SEC initiated legal proceedings against Ripple Labs, Chris Larsen, and Brad Garlinghouse, who was the CEO at the time. The SEC accused Ripple of conducting an unregistered offering of XRP tokens, which it claimed violated federal securities regulations.

Since the lawsuit was filed, the core argument has revolved around whether XRP is a security. The SEC posited that XRP should be classified as a security based on how it was initially sold and distributed by Ripple, akin to traditional securities such as stocks and bonds. If classified as a security, Ripple would face a myriad of regulatory obligations and potential consequences for failing to comply with securities laws.

Ripple and its leadership countered that XRP operates as a decentralized cryptocurrency, distinct from Ripple Labs itself, and should not be classified as a security. They maintained that XRP functions primarily as a utility token, created to aid in international transactions on the XRP Ledger.

The legal representatives for both parties intensely debated these issues in court, transforming this case into a pivotal focus for the wider conversation about how cryptocurrencies should be regulated and the ambiguous distinctions between securities and utility tokens.

Over the ensuing years, the back-and-forth of legal motions, hearings, and information requests between Ripple and the SEC kept speculation alive regarding the case's outcome and its potential ramifications for the cryptocurrency sector.

Timeline of legal events

• On December 22, 2020, the SEC filed its lawsuit against Ripple Labs, Chris Larsen, and Brad Garlinghouse, asserting that they had engaged in an unregistered offering of XRP. Subsequently, Coinbase delisted XRP.
• In January 2021, Ripple's CEO Brad Garlinghouse announced their intention to contest the SEC's accusations in court. Ripple responded to the SEC's lawsuit, reiterating its belief that XRP does not qualify as a security and asserting the token’s inherent value and utility.
• In March 2021, the SEC sought to expedite the trial process, while Ripple requested access to internal SEC documents regarding the agency's stance on cryptocurrencies. Judge Sarah Netburn noted that XRP has both utility and currency value. tells SEC By May 2021, the defendants submitted a legal memorandum to the court, calling for the dismissal of the SEC’s case on various legal grounds.
• In August 2021, the court approved Ripple’s motion, requiring the SEC to release records of its internal deliberations regarding whether XRP, Bitcoin, or Ether should be labeled as securities.
• By October 2021, both parties submitted a joint motion aimed at setting a deadline for expert discovery in January, allowing both Ripple and the SEC to bring in expert witnesses for opinions, analyses, or testimonies regarding the case.
• In January 2022, the expert discovery phase was postponed for a month, now scheduled to conclude by February 28.
• September 2022 saw the Chamber of Digital Commerce file an amicus curiae brief to the court in support of Ripple.
• In October 2022, a judge in the case mandated that the SEC release the \"Hinman documents,\" which included emails connected to SEC’s Director of Corporation Finance, William Hinman, discussing his 2018 address where he indicated that Ethereum did not appear to be a security.
• By December 2022, the SEC attempted to prevent the release of these Hinman documents.
• In June 2023, the Hinman documents were made public after being unsealed.
• In July 2023, Ripple celebrated a partial legal victory when Judge Torres concluded that XRP does not qualify as a security for retail investors, yet considered it a security when sold to institutional clients.
• Just last Thursday, the District Court for the Southern District of New York determined that the \"offer and sale of XRP on digital asset exchanges did not constitute offers and sales of investment contracts.\" However, the judge ruled that Ripple Labs breached securities laws by selling XRP to institutional clients.

The aftermath

This ruling seems somewhat contradictory. James Carlson, a professor of securities regulation at New York University, pointed out that securities laws were originally established to protect retail investors, who may not have the same ability to safeguard themselves as institutional investors do. Carlson indicated that \"large institutional investors don’t need the protections that securities laws provide,\" thus suggesting that this judgment flips the original intent of these regulations on its head, as reported by The Information.

Nevertheless, the decision was still seen as a triumph, not just for Ripple, but for the broader crypto and Web3 community which regarded it as a moment for celebration. The importance of this victory is amplified, especially considering the recent lawsuits filed against Binance and Coinbase by the SEC for securities law infringements.

In the aftermath of the court ruling, XRP's price climbed over 60% within a 24-hour period from Thursday to Friday, according to CoinMarketCap. Data from CoinGecko showed that XRP trading volume on Upbit soared to $2.7 billion during this time, reflecting a 41% increase. The cryptocurrency's price jumped from $0.47 to $0.76 at the current time of writing.

W.

W for @ripple .
W for the industry.
W for the builders.
W for a clear rulebook.
W for updating the system.

Oh, and XRP is now open for trading.

— Coinbase 🛡️ (@coinbase) July 13, 2023

Major exchanges such as Coinbase, Kraken, and Bitstamp jumped on the bandwagon by relisting XRP last Friday, while Gemini announced that it is considering adding XRP for both spot and derivatives trading. The stock price for Coinbase also experienced a 24% boost on Thursday, culminating in a closing value of $107.

While Ripple's legal win represents a positive step forward for other cryptocurrency projects that encounter similar classification challenges from the SEC, the future of their legal struggles remains uncertain as the industry eagerly awaits clear regulatory guidelines from the SEC. tweeted In a statement published last Friday, John Reed Stark, the former head of the SEC Office of Internet Enforcement, expressed his belief that the court’s ruling regarding Ripple \"will likely be challenged through an appeal in the future.\"

Stark raised questions about why tokens are regarded as securities in sales to institutional clients, yet \"mysteriously transform into 'not securities' when those same institutional investors or the issuer themselves sell the tokens on platforms like Coinbase or Binance.\"

Could the court’s ruling be appealed?

In an essay He also criticized the court for establishing a semi-class of securities that seems to vary based on the purchaser's level of sophistication or knowledge when acquiring the tokens.

In this light, Stark noted that the ruling appears counter-intuitive, at odds with established SEC case law, and represents an unprecedented approach. It essentially suggested that Ripple's marketing and operations complexities were beyond the comprehension of an average retail investor but understandable for institutional clients, who would grasp the full implications of token purchases.

He expressed disappointment at the court's implication that retail investors are \"naive\" and lacking intelligence. \"Securities laws were designed to protect individual investors, based on the understanding that they can’t adequately protect themselves. Exploiting those investors can lead to chaotic market incidents, like the 1929 crash. The Ripple ruling completely undermines this principle,\" he explained.

Drawing a parallel to equities, Stark emphasized, \"A stock is always a stock – it can’t just morph into ‘not stock.'\" He conveyed his expectation that the SEC would appeal the Ripple ruling to the 2nd Circuit, where the District Court's conclusions concerning “programmatic” and “other sales” could be overturned.

Ripple vs. SEC: All You Need to Know - Metaverse Post

The excitement surrounding Ripple's recent partial success in its protracted legal dispute with the SEC continues to generate buzz, especially after SEC commissioner Gary Gensler shared his thoughts.