In 2020, the U.S. Securities and Exchange Commission (SEC) sued Ripple Labs and its current and former CEOs.
The SEC claimed that Ripple Labs was selling unregistered securities to raise funds. The unregistered security, in this case, was XRP, a crypto token. The SEC that Ripple Labs used XRP to pay for services such as market making and labor.
Generally speaking, the However, Ripple Labs decided that it wouldn't settle the suit outside the court and would see the case to its legal conclusion in court. And that's how the Ripple and SEC case started.
Background of the Case
Ripple Labs is an American tech company that was established in 2012. The company's main product is the Ripple payment protocol and its exchange network. The goal of Ripple Labs is to build a more resilient international financial system.
Ideally, Ripple Labs to (or at least complement) SWIFT, the current framework for cross-border payments. To do that, the company created a network where payments can be sent and settled in real time.
The payments on this network were to be completed using a cryptocurrency called XRP.
However, in 2013, Ripple Labs started selling XRP to the public. According to the SEC, this was an Initial Public Offering (IPO) in disguise.
In 2020, the SEC decided to take action by suing the company. In its lawsuit, the SEC claimed that the sale of XRP tokens was an IPO of an unregistered security. Since XRP was never registered as a security, the SEC claimed that Ripple Labs had committed fraud.
The lawsuit also claimed that Ripple Labs didn't just sell unregistered securities, the company also used those securities as a means of exchange for non-cash services. This includes offering XRP bonuses to
Importantly, the SEC that Ripple Labs never made any move to register their XRP sales or offers. The company's sales also failed to meet any legal exemption that might have prevented the sales from violating federal law.
Lastly, the SEC took the present and former CEOs of Ripple Labs to the task. The lawsuit named Chris Larsen, the former CEO and co-founder of Ripple Labs, and Brad Garlinghouse, Ripple Lab's present CEO.
The SEC that both Larsen and Garlinghouse had personal unregistered XRP transactions that were valued at around $600 million.
Once the SEC filed its lawsuit against Ripple Labs, fear, uncertainty, and doubt spread in the market. Whales and retailers alike dumped the XRP token, and
This was despite the fact that the crypto market was riding a bull market at the time, and the token had experienced an all-time high in the same period.
Ripple Labs Replies to the SEC
When Ripple got notice of the SEC's lawsuit, it decided not to settle out of court and fight the case in front of a judge.
The response of the company was immediate and scathing. Brad Garlinghouse, the CEO of the company, quickly took to Twitter to note his displeasure at the suit.
In court, Ripple's lawyers that the SEC never gave Ripple any notice. This is a claim that the SEC didn't contest. Ripple's lawyers also claimed that the SEC was biased in applying the ideas of securities to cryptocurrencies like XRP.
Ripple's lawyers also argued that other cryptocurrencies, like Ethereum, were not given the same treatment that is now applied to SEC.
The lawyers claimed that the entire basis of the suit was wrong as a matter of law, as parts of the U.S. government, such as the Justice Department and the Treasury Department's FinCen have already designated XRP as a currency.
Hence, Ripple's lawyers claimed, the SEC suit couldn't possibly be correct.
Therefore, Ripple's defense rests on two important arguments. The first is that the SEC wrongfully targeted Ripple, and the second was that XRP was a currency, not a security.
In Garlinghouse's , he clarified that XRP wasn't a security because it wasn't an investment contract. This means that people who hold XRP do not share in Ripple Lab's profits or expect dividends.
Secondly, Ripple Labs already has its own class of shareholders. Garlinghouse argued that selling XRP to retailers didn't mean the buyers could become Ripple Labs shareholders. This meant that XRP was never marketed or sold as a security.
Lastly, Garlinghouse argued that the value of XRP isn't correlated to the activities of Ripple Labs. Instead, the value of XRP has been correlated with the value of other such virtual currencies.
In the end, Garlinghouse, in his robust reply, made it clear that Ripple Labs would be fighting the SEC case in court and would never settle.
The SEC Lawsuit Progress
The SEC lawsuit started in 2020, and it's not yet done. Over the last two years, there have been several important developments in the case. Here's a conclusive timeline of those developments.
- December 22; The SEC filed the suit against Ripple Labs and its present and former CEO. On the same day, Brad Garlinghouse, the company's present CEO, decided to fight the case instead of settling.
- December 28, 2020; Coinbase delists XRP.
- March 3; Ripple Labs begins its legal arguments by claiming that the SEC failed to issue fair notice to it about XRP's status.
- March 8; The SEC requests a trial immediately.
- March 22, 2021; Judge Netburn tells the SEC that
- April 13, 2021; M. Pierce, the SEC commissioner, publishes the Token Safe Harbor Proposal 2.0. This proposal offers a three-year grace period for developers to understand their participation in decentralized networks.
- June 2021; The court extends SEC's deadline to disclose its internal crypto trading policies to August 31, 2021.
- October 2021; Expert discovery deadline for gathering opinions from experts on whether XRP is a security or not.
- September 2021; Judge to disclose the XRP holdings of SEC employees.
- September 13, 2022; SEC moves to of its expert witnesses.
- September 2022; SEC and Ripple Labs argue for summary judgment on whether Ripple Labs violated federal law in selling XRP.
- September 29, 2022; Judge rules to release emails written by former SEC Corporation Finance Division Director William Hinman that related to a speech where he said that ETH wasn't a security because it was
- December 2, 2022; SEC and Ripple Labs file
The judge is yet to pass summary judgment on the case, but according to certain analysts, that decision will be made soon. That judgment may also include conclusions on the different sealing motions that both the SEC and Ripple Labs filed.
The LBRY Case May Be Connected to Ripple
Judgment on the XRP case may not yet have been passed, but the SEC has recently prosecuted a similar case.
The SEC recently won its case against a blockchain-based payment and file-sharing network called LBRY. The LBRY case garnered a lot of attention because of its similarities with the Ripple Labs case.
LBRY uses its token, the (LBC) credit, to reward users who perform tasks on the network. These tasks include referring new users, publishing content, and contributing to projects. The LBC credit can either be mined or bought.
In 2021, the SEC filed a case against LBRY, arguing that the network was selling an unregistered security. This unregistered security is the LBC token. In court, the SEC sought an injunction against the sale of the tokens and argued for a release of all funds realized from the sale of the tokens.
However, LBRY made roughly the same argument as Ripple. It argued that its LBC credit wasn't for investment purposes and that it had utility at the time of its launch. The argument was that something, the LBC token in this case, that had a function was a security, not a commodity.
Like Ripple, LBRY also argued that it had not gotten notice from the SEC.
Unfortunately for the network, the court disagreed. First of all, the court judged that LBRY didn't need fair notice from the SEC. LBRY, the court , ought to judge for itself whether it was selling unregistered securities or not.
Secondly, the court judged that LBRY had led investors to believe that the value of their tokens would grow as the company continued to oversee the LBRY network.
While LBRY argues that it made disclaimers arguing that LBC credits were not tokens, the court decided that .
One can only speculate on the question of whether this judgment might influence Ripple's case. The important thing to understand is that the LBRY case has no procedural effect on Ripple's case with the SEC.
The LBRY case was heard in the U.S. first district, while the Ripple and SEC case is being heard in the second district.
No one really knows how the SEC and Ripple case will end. But what we do know is that the ruling will have a huge impact on the future of cryptocurrencies.
