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SEC vs. Ripple

What Is the SEC vs. Ripple Lawsuit?

SEC vs. Ripple is an open court case in the United States Southern District Court of New York that could decide the future of cryptocurrency regulations and determine if it is a security or a commodity. It may be decided in the first half of 2023.

In 2020, the U.S. Securities and Exchange Commission (SEC) alleged that Ripple, the blockchain developer and creator of the XRP cryptocurrency token, raised more than $1 billion in 2013 through the sale of XRP in an unregistered security offering to investors. Ripple, relying on the previous comments of an SEC director to support its case, argues that XRP should not be treated as a security.

Key Takeaways

  • Ripple Labs is a blockchain developer and creator of the XRP token.
  • The U.S. Securities and Exchange Commission (SEC) has accused Ripple of using XRP to sell unregistered securities.
  • The outcome of the U.S. regulator’s court case against Ripple will have far-reaching consequences for the cryptocurrency industry.

Why Is the SEC vs. Ripple Case So Important?

The SEC vs. Ripple case sent shockwaves through the cryptocurrency sector when blockchain projects had been operating with little regulatory oversight. There had been fears of future regulatory action, but this was the most high-profile example of a securities regulator targeting an initial coin offering (ICO).

If Ripple loses the case, it could open the floodgates for similar actions against other crypto projects, likely leading to tighter regulation of the industry. The SEC’s argument is that Ripple’s ICO—and, by extension, other ICOs—is the sale of a security that must be registered.

Victory in court would effectively make the SEC the main crypto regulator. The world currently awaits a ruling by Judge Analisa Torres.

What Are Ripple and XRP?

Ripple Labs was founded in 2012 as OpenCoin, but later changed its name and launched the XRP token. At the time, there were fewer cryptocurrencies, so with its large coin supply and fast transaction speeds, XRP was seen as a new solution for cross-border remittances.

The XRP token grew from millions to billions in terms of market capitalization in 2017, with continued growth in the following years. However, once the SEC filed suit in December 2020, crypto exchanges such as Coinbase suspended trading in XRP, and that added to the negative sentiment surrounding the coin.

The timing for Ripple Labs was terrible. The suit was filed just ahead of the largest bull market in cryptocurrency history—when Bitcoin (BTC) eventually soared to highs above $64,000 per token in 2021. XRP’s price remained depressed throughout that rally, with investors spooked by the SEC court case’s outcome.

The final ruling could also be unfortunate for Ripple, as it comes as the market has been hit by a series of frauds and scandals, including the late 2022 collapse of cryptocurrency exchange FTX and criminal charges of fraud, conspiracy, campaign finance law violations, and money laundering against former FTX CEO Sam Bankman-Fried. As the fallout from the FTX bankruptcy spreads throughout crypto markets and beyond, market participants and government officials call for stronger regulations.  

Understanding the SEC’s Ripple Lawsuit

The SEC charged Ripple—and two of its executives, Brad Garlinghouse and Christian Larsen—with selling unregulated securities valued at more than $1.3 billion to the public over the years via their company-offered XRP.

Included in the SEC filing were transactions from 2013 through late 2020, which accounted for more than 14.6 billion XRP sold in return for cash.

It has been commonplace for cryptocurrency projects to fund their staffing and operations from the sale of their tokens, while executives also benefited from cash sums brought in. The case hinges on the definition of a coin sale. The SEC contends that if it’s a security, it must be registered. Ripple argues that a crypto coin isn’t a security.

The SEC said Ripple never filed a registration document, which is a requirement for companies in the stock market when they are seeking to raise capital from the public. The regulator complained in the lawsuit that Ripple had “created an information vacuum” and only shared information that it felt necessary.

The outcome has large implications for both parties and the broader crypto market. The SEC wants to bring the cryptocurrency industry under its regulatory umbrella, and a win against Ripple would start the ball rolling. Ripple would likely face a hefty fine, but there could also be further action against key executives. All of this could impact development at the project.

What the Ripple Suit Means for Cryptocurrencies

In September…

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