For those who don’t know the nuance of what happened between the SEC and Ripple, please read on as we share the entire story.
The SECvs. Ripple is one of the most infamous lawsuits in the history of cryptocurrencies and regulatory bodies. SEC sued Ripple for allegedly selling XRP (the token by Ripple) without registering it through exchanges or even registering it as security. 2024 is the fourth year of this lawsuit being fought against each other.
Since 2020, this case has taken many turns and revealed many sides. The SEC’s demand for categorizing cryptocurrency—XRP can affect the status of Ripple and other cryptocurrencies in the industry.
However, the recent court ruling has given this case a new perspective that might change the course of security as to how the authorities are defining security. It may also change the end result of the case, for example, the court might give a ruling on changing the definition of security or even give a ruling over the approach for the deadlines when it comes to filing with strong evidence. Before we discuss the conclusion, please have a look at the SEC’s demand and the allegations against Ripple Labs.
The SEC’s Case Against Ripple
Till the US authorities don’t have a separate platform to address cryptocurrency-related issues, the SEC is the authority that monitors cryptocurrency in the US. That’s why the SEC took the responsibility to keep an eye on the activities within the domain of cryptocurrency. SEC had filed a case against Ripple Labs, stating that the XRP token by Ripple operated as an unregistered security and should have been registered with the SEC, as it was the governing body before it was circulated in the market.
The unregistered XRP tokens being sold to the investors was the crux or bone of contention of this lawsuit. However, the definition and classification of what forms or includes the category of security backfired SEC. The only thing that made the case twisted was the interpretation of security under federal law.
Now, we jump to what the law says and on what basis the SEC is filing the case. The SEC took it one step further to the court in regards of the Howey Test. In legal terms, it is a framework that was formed in 1946 by the Supreme Court to check if the investment under consideration qualifies as security or not. What are the key factors or aspects that the Howey test involves to check the qualification of security?
- The money or value in any form is being invested.
- There should be a reasonable expectation for profit margin.
- The enterprise structure or investment scheme should be common to invest money in.
- The contract must show that the security is ready to be traded.
The SEC based its argument on the fact that XRP falls under all four aspects of the Howe Test, therefore, it should be considered as a security. As a matter of fact, if it is a security then why didn’t the company fail to follow the federal security laws? Why they didn’t register XRP with the SEC? Is it to hide the company’s financial standing because the registration will demand them to disclose their financial info? SEC focused the case on registration as it would help with transparency and investor protection in the market.
Ripple’s Defense
Do you think Ripple would say nothing in its defense? The Ripple Labs countered the SEC’s claims by arguing upon the definition of security that SEC has declared. The company said that XRP exists and functions as a currency so there is no point in declaring it as an investment. XRP is made to be utilized as a medium of exchange to fulfill the purpose of fast and cheap cross border transactions.
They said XRP can be used in exchange to settle payments with international partners just like people use US dollars. Also, as a matter of fact, Ripple didn’t develop XRP to function as a security so there is no need for a Howye Test. Their investors don’t expect profits from Ripple’s efforts as a company or shares. They can get profit or loss depending on the market forces just like any other currency.
The New Turn
Now the most recent development in this case of SEC VS. Ripple occurred in March 2024 where the case revolves around the upcoming deadlines for filing further briefs giving prospective benefits. The Court Judge Analisa Torres gave a ruling that the sale of XRP for some investors was indeed done as unregistered selling of securities. But, the court also agreed to the fact that automated selling through a platform like Quantum AI is not a transaction of securities.
Now that ripple has violated the law of registered selling they should get some consequences. The SEC has asked Ripple Labs to pay around $2 billion as penalty so that Ripple prevents further unregistered selling of XRP.
Final Thoughts
Whoever wins the case the outcome would largely affect the cryptocurrency industry because if the court takes the side of SEC and makes XRP a security then it can change the course of how other cryptos would be regulated. The authorities that are already struggling to make reforms to regulate and control cryptocurrency will have more pressure to strictly regulate the entire industry.