Looking back at the three-year-long Ripple case, does the court ruling have epoch-making significance?
Original Author: Jaleel, BlockBeats
Original Editor: Jack, BlockBeats
Last night, Ripple Labs' three-year lawsuit with the U.S. Securities and Exchange Commission (SEC) finally came to a conclusion. Ripple won the case in the Southern District of New York, and Judge Analisa Torres ruled in favor of Ripple Labs, stating that XRP is not a security. According to the court's ruling, activities such as using XRP to invest in others, issuing grants with XRP, and transferring funds to executives using XRP are not considered securities.
After Ripple won the ruling that XRP is not a security, the overall sentiment in the entire cryptocurrency community was jubilant.
As a result of this news, XRP's significant upward trend surged to over $0.9 in a short period, with a 92.89% increase. At the time of writing, it is currently priced at $0.5432. Bitcoin and Ethereum also experienced temporary uptrends, with Bitcoin reaching a new high this year by surpassing $31,800, and Ethereum surpassing $2,000. Cryptocurrencies such as SOL, ADA, MATIC, which were previously classified as securities by the SEC, also saw significant gains in the short term.
Ripple CEO Brad Garlinghouse emphasized that the most important part of this ruling is that XRP is a digital token and not an investment contract that meets the requirements of the Howey Test. It is now a legal question that no longer requires judgment.
"We said in December 2020 that we are on the right side of the law and the right side of history. Thanks to everyone who helped make this decision today - it's a decision for all cryptocurrency innovation in the United States. There will be more in the future." Brad Garlinghouse said on Twitter.
Epic Battle in the Crypto World
The history of Ripple can be traced back to 2004 when developer Ryan Fugger created a project called "RipplePay." Its core was to establish a peer-to-peer payment network that could replace the banking system, which sounds very similar to Bitcoin.
Ripple gained attention in April 2013 when it raised $1.5 million in funding from institutions such as Google Ventures, a16z, IDG Capital Partners, Lightspeed Venture Partners, Bitcoin Opportunity Fund, and Vast Ventures.
In addition to endorsements from institutions like Google Ventures and Lightspeed Venture Partners, Ripple seems to have the backing of a Japanese consortium. In September 2016, the SBI Group acquired a 10.5% stake in Ripple for $55 million. In 2017, they also established a collaboration, SBI Ripple Asia, with SBI Group holding a 60% stake.
On January 4, 2018, the price of XRP reached a historical high of $3.31, with a year-over-year increase of over 500 times. Its market capitalization was comparable to Google, Apple, and Alibaba. Ripple's co-founder Chris Larsen became the world's fifth richest person with a net worth of $59 billion, surpassing Mark Zuckerberg. However, he was also criticized as the "wealthiest individual who contributes the least to the real world."
The legal battle between Ripple and the SEC has been going on for three years since 2020.
Initiating a Legal Battle: Is XRP a Security?
On December 22nd, 2020, the Securities and Exchange Commission (SEC) officially filed a lawsuit against cryptocurrency company Ripple Inc. According to the official website of the SEC, Ripple and its CEO Brad Garlinghouse and co-founder Chris Larsen are the defendants.
The defendants are accused of raising over $1.3 billion in funds through continuous and unregistered issuance of digital asset securities since 2013, such as labor and market maker services. In addition to organizing and promoting XRP sales to fund the company's operations, Chris Larsen and Brad Garlinghouse also conducted unregistered personal sales of XRP, totaling approximately $600 million. This violates the registration provisions of the Securities Act and seeks injunctive relief and civil penalties, among other remedies.
After the news of the SEC's official lawsuit came out, the price of Ripple's token XRP plummeted. Within 48 hours, XRP fell from 0.58 USDT to 0.34 USDT, with a cumulative maximum decline of 42%.
Brad Garlinghouse, the CEO of Ripple, bluntly stated, "Legally and factually, the SEC is wrong." The Ripple team does not seem to indicate any intention to settle, stating, "Without a doubt, we are ready to fight and win - this battle has just begun."
The lawsuit revolves around whether Ripple's digital asset XRP, launched in 2012, should be registered with the SEC. Registration involves disclosing a company's business model, risks, and financial condition to the SEC and the public. The SEC reviews the disclosed information and provides feedback to improve disclosure to investors.
Since then, both parties have entered into a protracted legal battle, with the focus of contention still on whether "XRP is a security."
No Settlement, Lawsuit Enters Intense Stage
"Here's a little secret of the U.S. court system: even 10% of cases cannot be litigated. Judges always pressure lawyers to settle because the fact is, if more cases have to be litigated, the system will collapse. There simply aren't enough resources. This applies to both civil and criminal cases." Prominent lawyer Jeremy Hogan wrote on Twitter.
Jeremy Hogan said that less than 10% of civil and criminal cases in the United States end up going to trial due to the limited capacity of the legal system to handle a higher volume of cases. Only a small portion of cases ultimately go to trial. He added that judges who are aware of this fact often put pressure on the lawyers of the parties involved to facilitate settlement.
Therefore, many speculate that the SEC may ultimately try to reach a settlement with Ripple, but both the SEC and Ripple have unexpectedly taken a hardline stance.
In a letter jointly submitted to Judge Analisa Torres of the Federal Court for the Southern District of New York on February 15, 2021, both the SEC and Ripple, as well as the two founders, expressed that the possibility of "settlement before the pretrial conference on Ripple's alleged securities violations" is unlikely.
The lawyers for the parties involved have already negotiated and believe that there is currently no prospect for resolving the issues. The letter states that previous settlement discussions were conducted under the leadership of the Trump administration and in the context of a former department head who has since left the SEC. But now the situation has changed.
In late December 2020, when the SEC formally filed a lawsuit against Ripple, Ripple CEO Brad Garlinghouse called it an attack on the entire cryptocurrency industry. He also stated that he and Ripple Chairman Chris Larsen could choose to settle. However, he rejected this point in order to uphold his beliefs and pave the way for the rest of the crypto industry.
"Chris Larsen and I can choose to resolve our differences separately. We can do this, and all of this will be in the past. It didn't happen, that's the confidence Chris Larsen and I have, and we are right. We will actively pursue and prove our case. Through this case, we will establish clear rules for the industry here in the United States." Brad Garlinghouse said.
Gensler's firm attitude is not only to compete for regulatory authority over cryptocurrencies but also a response to the continuous emergence of complex and confusing operational models in the cryptocurrency industry. Because under such complexity, it is easier to give rise to gray areas. According to foreign media reports, Gensler, the chairman of the U.S. Securities and Exchange Commission, recently testified in Congress, criticizing the compliance of cryptocurrencies and expressing concerns about stablecoin regulation. He said, "I've been in the finance industry for 40 years and have never seen an area so out of compliance with securities laws." He also confirmed that if cryptocurrency tokens are deemed securities, any exchange trading such tokens would need to register as a national securities exchange and be subject to SEC regulation. Gensler's attitude towards regulation is extremely firm, insisting on maintaining existing regulatory guidelines without making significant changes.
This dispute will set the tone for future U.S. regulatory rules and will also impact the direction of the cryptocurrency market. Therefore, the victory of one side will inevitably compress the rights and space of the other side, resulting in a stalemate between the two.
SEC Fails in the Battle for 'Cryptocurrency Securities'
In the Ripple lawsuit, a lawyer involved in the lawsuit previously stated that the SEC's own experts have acknowledged that the prices of the two major cryptocurrencies, Bitcoin and Ethereum, have explained up to 90% of the price fluctuations of XRP since mid-2018. At the same time, the SEC also believes that Ripple Labs' high percentage of XRP holdings implies that XRP is centralized and is a security. These two statements and positions are contradictory.
Looking back to early June, two of the world's largest cryptocurrency exchanges were successively sued by the SEC. In the SEC's lawsuit against Binance, it mentioned that more than ten mainstream cryptocurrencies, including BNB, BUSD, SOL, ADA, MATIC, FIL, ATOM, SAND, MANA, ALGO, AXS, and COTI, have been defined as securities and fall under SEC regulation.
SEC's continuous and strong "Power Move" against the cryptocurrency industry has shocked everyone, and the current chairman of the SEC, Gary Gensler, who is actually in command, has become the true "exterminating nun" of the cryptocurrency field. Since Gensler took over the SEC, the regulatory attitude toward cryptocurrencies has become more aggressive.
In August 2021, Gensler spoke as the chairman of the SEC at the Aspen Security Forum, stating that various areas of cryptocurrency are subject to securities laws and need to be regulated by the SEC. In subsequent public occasions and conferences, Gary Gensler cited a Supreme Court Justice Thurgood Marshall's opinion from 1990 as evidence: "When someone raises funds from the public and the public participates in the profits, it is considered a security." He stated that the majority of tokens are securities and should be regulated by the SEC.
Based on this, Gensler's "enforcement team" began a series of investigations into different tokens and provided detailed explanations of "investment contracts" based on the Howey Test, trying to push the narrative that "cryptocurrencies are securities" into the mainstream. On November 8, 2022, the U.S. District Court for the District of New Hampshire ruled in favor of the SEC in the case of accusing LBRY of issuing unregistered securities, determining that the cryptocurrency LBC issued by LBRY is a security. The SEC achieved an important victory in the battle over "cryptocurrency securitization" and added new bargaining chips to its protracted struggle with Ripple (XRP).
However, contrary to expectations under the SEC's tough and cold attitude, the U.S. court made a ruling that "XRP is not a security," causing the SEC to suffer a setback.
Final Verdict?
Paul Grewal, Chief Legal Officer of Coinbase, believes that according to the ruling on page 15: "XRP, as a digital token, does not itself represent the 'contract, transaction [or] plan' required by the Howey test for an investment contract." And on page 25: "Ripple's programmatic sales of XRP on digital asset exchanges do not constitute offers and sales of investment contracts." XRP already meets the listing criteria.
"We have read Judge Torres' thoughtful decision and carefully reviewed our analysis. It is time to relist XRP," said Paul Grewal on social media.
According to a tweet from Fox News reporter here, the SEC has responded to the court's ruling that XRP is not a security:
We are pleased with the court's ruling, which finds that Ripple, in certain circumstances, offered and sold XRP tokens in the form of investment contracts that violated securities laws. The court agrees with the U.S. Securities and Exchange Commission's view that the Howey test determines the securities analysis of cryptocurrency transactions and rejects Ripple's self-created test for what constitutes an investment contract, instead emphasizing that Howey and subsequent cases have established that various tangible and intangible assets can be the subject of investment contracts. In addition, the court dismisses Ripple's fair notice argument, stating that the Howey test is clear and claiming ignorance cannot be used as a defense against violating securities laws. We will continue reviewing the court's decision.
Ripple Case, the Good and the Bad
Adam Cochran, a partner at Cinneamhain Ventures, tweeted that this is primarily very good news for all altcoins. After all, it is an unexpected big win for XRP.
Throughout the lengthy three-year legal process, the price fluctuations of XRP have been a clear reflection of the community's sentiments towards the lawsuit. Earlier, there were reports predicting that Ripple might win against the U.S. Securities and Exchange Commission (SEC) in the lawsuit, and once this news came out, the XRP token skyrocketed by over 20% in just 24 hours. Recently, the surge in the price of XRP has also been fueled by the active support of several well-known YouTubers and community influencers. They firmly believe in Ripple's victory in the lawsuit, leading to a significant increase in the price of XRP. Moreover, just in the early morning when the ruling was released, the increase in XRP was astonishingly over 92.89%.
Furthermore, according to the judgment, the judge did determine that the institution's sales/fundraising activities constitute securities transactions.
However, the programmatic sales on the trading platform do not meet the third prong of the Howey test. So, this means that sales to users via exchanges are allowed as long as they are done through order books rather than through ICO/IEO/Launchpad methods. This also means that one of the big winners here is the exchange. If sales by institutions, over-the-counter trades, and direct token sales are deemed securities, then all sales will once again move through a public order book. There will no longer be billions of dollars of convertible financing in the early stages.
After all, XRP is one of the more centralized foundations with key leaders, conducting standard sales via trading platforms, and having a formal distribution plan. If XRP, which does all these things, is not a security, then almost everything sold through trading platforms is not a security. If XRP is not a security, it is obvious that BTC and ETH are not securities either.
This also seems to mean that the Bitcoin ETF applications submitted by Wall Street giants like BlackRock may have a chance of success.
Adam Cochran also pointed out that it is important to note that this ruling is for the motion to dismiss the case, and further trial and appeals can take place. This does not mean the case is over, but it is a significant victory with strong reasons.
Although the case has not been formally concluded, the entire Ripple vs. SEC lawsuit is a microcosm of the current U.S. crypto market. The emerging crypto market still faces a lot of uncertainties in terms of regulations and supervision. Due to the lack of clarity in the scope and responsibilities of regulation, crypto companies find it difficult to stabilize their expectations of regulation. The crypto market urgently needs a clear regulatory framework to reduce potential market chaos.
The outcome of this lawsuit may become a turning point for crypto regulatory reform and have epoch-making significance.
