The future of cryptocurrencies is at the mercy of a peculiar lawsuit brought by the US Securities and Exchange Commission (SEC) against blockchain innovator Ripple Labs Inc.
The lawsuit, filed on December 22, 2020, states that Ripple raised more than $1.3 billion through illegitimate means. The SEC’s complaint also holds Christian Larsen, Ripple’s co-founder, and Bradley Garlinghouse, Ripple’s current CEO, liable, citing that they made significant gains in the process.
If the SEC wins the case, XRP (the native cryptocurrency of the Ripple Blockchain) will be considered a security rather than a currency in the US. This could, in turn, set a legal precedent that similar cryptos would otherwise be classified as securities. Therefore, the case against Ripple is important for all stakeholders in the crypto space, including investors, blockchain innovators and legislators around the world.
Why was Ripple Labs Inc sued?
Between 2013 and 2020, Ripple Labs sold XRP tokens to raise capital worth $1.3 billion. When the SEC filed a complaint against Ripple Labs in late 2020, there was no sign that the SEC was monitoring Ripple. And at the time, Ripple was already trading on more than 200 exchanges.
However, the SEC believed that Larsen and Garlinghouse had raised capital illegally, as XRP was not a registered security, but was being offered to investors around the world. The SEC also claimed that Ripple Labs used marketplace services for non-cash transactions in which they paid in XRP to push their token sales.
“According to the complaint, in addition to structuring and promoting sales of XRP used to finance the company’s operations, Larsen and Garlinghouse similarly made unregistered personal sales of XRP totaling approximately $600 million. The complaint alleges that the defendants failed to register their offers and sales of
How did Ripple respond?
The SEC received no response from Ripple Labs for 39 days. However, the blockchain company quickly turned to Twitter to clarify the company’s position, purge its image and maintain investor confidence. Garlinghouse proclaimed that the SEC’s battle was not just against Ripple but the blockchain industry as a whole.
He went on to counter-argue that Ripple had been hand-picked for direct scrutiny and that the SEC “should not be able to pick and choose what innovation looks like (especially when their decision directly benefits China)”.
Garlinghouse also authored a blog that was published the same day as the Twitter response. He explained how Ripple Labs worked with the SEC to avoid regulatory breaches. He even explained to Ripple Labs employees that XRP was not an investment vehicle and that token holders were completely insulated from any right to the company’s profits. If they wanted to become shareholders, they would have to buy shares in the company, not the XRP token.
“This sets a terrible industry-wide precedent for any company working with a digital asset. With this allegation, coupled with the SEC’s “good management seal of approval” given only to ETH and BTC (directly benefiting China), they are creating an unfair advantage for companies here in the US – and significantly benefiting BTC and ETH. It’s just unbelievable that the SEC, an American regulator, is in the business of picking winners in this industry (or really any industry) and disadvantaging companies here in the US,” said the blog.
More importantly, Garlinghouse confidently stated, “We are not only on the right side of the law, but we will be on the right side of history.” The Ripple CEO also mentioned that US investors represented just 5% of Ripple’s market capitalization at the time, meaning their influence on the market and regulatory oversight bodies would be negligible.
Official legal response from Ripple Labs:
After the verbal conflict on social networks and several clarifications in the form of blog posts and tweets, Ripple officially filed its response in a 93-page document that cited four counters, as quoted below:
1. “The SEC is out of step nationally and globally,” as no regulator has ever mentioned that a virtual currency such as XRP must be registered as a security priority to the complaint, thus failing to provide legal clarity itself.
2. “The SEC is out of step nationally and globally,” as no regulator has ever mentioned that a virtual currency such as XRP must be registered as a security priority to the complaint, thus failing to provide legal clarity itself.
3. “The SEC is picking winners and losers”, because the SEC itself has stated that sales of Bitcoin and Ether are “not securities transactions”, meaning that XRP cannot be discriminated against.
4. “The SEC misrepresented the facts” because it interpreted and presented statements out of context. Garlinghouse himself wrote that he would prove the SEC’s allegations false in due course.
Ripple vs SEC: opinion and final verdict
The final verdict in this hugely watched case has yet to be made public. However, the decision is crucial, as it will reveal how regulators in the US view innovation and blockchain technology.
If the decision is in favor of the SEC, it will numb the feelings of all crypto protagonists and trigger a weakening of interest in the technological development of cryptosystems.
But, if the court favors Ripple Labs, less stringent regulations may apply. Moreover, technical innovation and blockchain development would be free to continue. It could also mean that other countries are inspired and take initiatives to further develop the underlying technology.
