The United States Securities and Exchange Commission (SEC) vs Ripple Labs is quite possibly the most important cryptocurrency-related court battle to date. This is because the outcome of this case may very well pave the way for the regulation of digital assets in the future.
Filed in a Manhattan Federal Court on the 22nd of December 2020, the SEC’s 70-page complaint against Ripple Labs and two of its executives – Brad Garlinghouse and Chris Larsen – accuses the company and executives of illegally selling a security when XRP tokens were distributed.
More specifically, the court document filed by the SEC points to a sum of approximately $1.4 billion. The company acquired them through what the securities regulator has labeled as an “ongoing sale” of unregistered securities. Furthermore, the SEC accuses the two executives of secretly selling off hundreds of millions of dollars worth of their own XRP holdings, while promoting the tokens as a good long-term investment.
“While he was selling millions of XRP, Garlinghouse frequently told investors that he was invested in XRP and that he was bullish on the investment, he also encouraged investors to be patient and look at the price of XRP on a longer time horizon,” as per SEC complaint.
Two Sides To A Story
Unlike the majority of other companies that find themselves in the SEC’s firing line – usually opting for a quiet submission through settling – Garlinghouse, Larsen, and Ripple Labs have opted to go toe-to-toe with the regulator.
Ripple is backed by an all-star team of legal professionals that includes names like, Stuart Alderoty and Mary Jo White. They and its executives plan to hit back at the SEC’s complaint on a number of grounds.
One is the approach that the SEC has taken when dealing with cryptocurrency-related cases. According to Alderoty – who spent close to two decades as legal counsel for traditional banks, one of the main reasons that the SEC’s case is fundamentally flawed is that firstly, the regulator failed to give fair notice and secondly, in doing so has created regulatory confusion instead of clarity.
Aldetory started “Not only have they failed to provide fair notice, we believe and we’ve alleged that they’ve actually created mass confusion in the marketplace.”
Another point that the defense is looking to exploit is the SEC’s timing. According to White, the SEC’s decision to take time in going after Ripple calls into question the regulator’s fairness.
“When it takes that long to figure out a case, you shouldn’t be bringing it. It’s not something I would do walking out the door,” said White.
She made her statement against the backdrop of the SEC’s earlier actions against EOS. It ran a year-long ICO that attracted roughly $4 billion in investment. That included Ethereum, and the ICO’s of chat apps Telegram and KIK. Despite that, Ethereum walked away from the court case.
In her opinion, these are major inconsistencies in how the SEC has approached different Cryptocurrency related cases.
What to Expect Next
The SEC continues its fight to have the court label Ripple Labs as securities violators. Ripple maintains its defensive position as a victim of an unfair and incompetent regulator. New York Federal Courts will have to decide the outcome of this encounter.
The SEC usually doesn’t bring a case to the court unless they are confident of a victory. The agency has also recently had faced scrutiny from Capitol Hill about their handling of so-called ”meme-stock” trading. This to some observes may present as an opportunity for Ripple Labs.
To further complicate the matter, a legion of about 12 000 XRP retail investors and users have decided to have their say in the matter. According to a filing they made on the 19th of April, the XRP holders are looking to join the proceedings as third-party defendants. Though firmly on the side of Ripple Labs, and working to “protect their interests”, they have not made any claims and/or counterclaims against the SEC.
There are many variables at play here. Observers and investors are certain of one thing, and the stakes are high for both sides. Gensler, the current chair of the SEC, has a losing outcome in this case. He has been slowing down his planned crackdown on Stable Coins and the Defi market. On the other hand, a victory could lead to an increase in his tempo.
For Ripple – which has faced strain on its relations with key partners like, MoneyGram and Tetragon – and the rest of the cryptocurrency market, the results of this case will have a far-reaching impact on the digital assets environment. A loss could dampen spirits and set off a downward trend. Though, a win would be a boon to confidence – only time will tell which it will be.