There’s an update on the ongoing lawsuit between the Securities and Exchange Commission (SEC) and crypto payments platform Ripple. The SEC claims Ripple executives profited from sales of their native token, XRP, while it was an illegally unregistered security. Meanwhile, Ripple claims the SEC had allowed sales of Ether as a ‘legally unregistered security’ that US citizens could trade freely and that XRP shouldn’t be treated any differently than ETH. Is there any way out of this dispute? Or does the future look bleak for XRP?
A brief overview of the situation
In late 2020, The US Securities and Exchange Commission filed a lawsuit against San Francisco-based blockchain startup Ripple Labs. The suit contends that XRP, a virtual currency and payment system created by Ripple Labs, is (or was at the time) an ‘illegally unregistered security’ and thus is subject to securities laws.
That is technically true. However, all crypto tokens at the time were unregistered securities. The federal government only just started looking into regulating cryptocurrencies. You might think that means they’re fair game, but in the larger picture, it means the government failed to address them. Cryptocurrencies are a trillion-dollar market, even after the recent crash that’s led to lower crypto values. Bitcoin, the original and highest-valued cryptocurrency, began in 2009. That’s 11 years the government allowed to go by before taking major action against Ripple.
However, Ripple’s lawyers point to a speech given in 2018 by the then-S.E.C. director of corporation finance Bill Hinman. In the speech, Hinman stated Ether, Ethereum’s native token, did not qualify as a security. Ripple is hoping Hinman’s speech can make its way into court. That would force the SEC to justify why they labeled one cryptocurrency platform ‘illegal’ when competitors weren’t.
What’s the current update on Ripple?
Empower Oversight, a non-profit, sued to obtain Hinman’s internal SEC emails they claim can prove a conflict of interest. The organization alleges the content of the emails can prove that the SEC was arbitrarily favoring some cryptos over others. When a federal agency tasked with regulating securities has a conflict of interest, it’s not suitable. It undermines the trust in national institutions and feeds into narratives of rampant corruption. The SEC and Ripple are still undergoing a legal battle, but the update of emails received by Empower Oversight could shake up the outcome.
The final straw will probably come when courts determine whether or not Hinman’s 2018 speech is allowed in the courtroom. Hinman allegedly detailed why cryptocurrencies like Ripple’s XRP needed to be registered as securities while Bitcoin and Ether did not. The distinction should be interesting since Bitcoin and Ether have a much higher value than most cryptos.
Are cryptocurrencies securities?
For a stock, security, or investment contract to be classified as such, four requirements must be satisfied. First, it must be an investment of money. Second, there must be an expectation of profit from investing in a given asset. Third, that profit comes primarily from others’ efforts (as opposed to your own). Finally, you need some sort of reliance on that other party for returns on your investment. If an asset doesn’t meet any of these conditions, you don’t have a security—you have something else entirely. So why is it that cryptocurrencies are considered securities? Because they meet all four conditions.
If a cryptocurrency meets all four requirements, it’s probably a security. If it doesn’t, then it may not be one. That sounds simple enough—but in practice, determining whether or not something is a security can be more complex than it seems. While cryptocurrencies meet the definitions of securities, they’re still a new form of tech and currency. Crypto-assets were born with the goal of becoming a decentralized global currency and payments platform. For many years, part of that vision was the lack of government oversight and regulation. Current SEC Chair Gary Gensler has been vocal about expanding protections for crypto-assets. It seems regulation is inevitable, but we still don’t know what it’ll look like.
Moving forward
The Ripple vs SEC lawsuit isn’t the only pending crypto update. 2022 has been the year where the federal government has seriously started looking into crypto. After President Biden issued an executive order in early March, things picked up. Current SEC Chair Gary Gensler has been vocal about working with the Commodities and Futures Trading Commission (CFTC) to protect crypto investors. After the recent Terra/Luna crash, Ethereum co-founder Vitalik Buterin said the FDIC should reimburse investors up to $250,000, per their security protection policies. A bill is also currently making its way through Congress to officially place cryptocurrencies under the CFTC’s purview.
There’s still a lot that needs to happen before we have answers. The current update on the SEC vs. Ripple case lets us know there’s a chance the federal agency could lose the case. That would be a big win for crypto supporters, as it would set a precedent for crypto activity before any impending regulations. People within the U.S. might be able to trade XRP again. As far as the case is concerned, it’ll all come down to what documents are approved and submitted to the court. Suppose Ripple manages to update court documents to include the emails Empower Oversight obtained through the Freedom of Information Act and Hinman’s 2018 speech. In that case, they may be able to prove hypocrisy on the SEC’s part.
- @diego-ferragut contributed to this article.
