At the end of 2020, the United States Securities and Exchange Commission initiated a groundbreaking lawsuit against Ripple Labs, CEO Bradley Garlinghouse, and co-founder Christian A. Larsen. The accusation was that they had raised more than $1 billion in 2013 by selling XRP (XRP) without registering it as a security.
The consequences of Ripple’s decision to contest the lawsuit in court extend far beyond the company itself. The verdict could be the benchmark for deciding if other cryptocurrencies are considered securities. Should Ripple prevail, it could ignite a new age of approval, investment and trust in digital assets.
Defeat, conversely, could impede widespread acceptance, encourage the SEC to initiate analogous lawsuits, cause market instability, and cause talented individuals to leave the United States.
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The timing of this potentially momentous ruling coincides with a period of intense inspection by the SEC, which is headed by Chairman Gary Gensler.
Ripple and XRP in the eye of the storm
Ripple, the business entity that created XRP, launched the digital currency token in 2013. Intended to expedite inexpensive international payments, XRP could possibly substitute the current SWIFT system.
Ripple has firmly entrenched its place in the financial world by forming alliances with prominent organizations, such as American Express, Santander and MoneyGram, and has handled more than $10 billion in transactions in 2021 alone.
The SEC’s accusation has to do with Ripple’s supposed unregistered sale of XRP, which the SEC considers to be an investment contract or “security”. Nevertheless, Ripple’s defense claims that XRP does not meet the criteria of the Howey Test, which is the standard for determining an investment contract, and thus cannot be classified as a security.
The court case thus rests upon the ongoing inquiry: Is XRP a security?
All eyes on the Hinman documents
The dispute between the SEC and Ripple that has been turbulent is anticipated to come to an end in September. Until then, the Ripple community will be focused on June 13th, when the Hinman materials are revealed, which could have a considerable effect on the conclusion.
These documents allude to a 2018 address given by SEC Director William Hinman, in which he gave advice on how the SEC could assess if a certain cryptocurrency should be deemed a security. This guidance was of great importance in the Ripple case, with Ripple’s defense claiming that Hinman’s remarks created uncertainty, causing market participants, including Ripple, to think that XRP was not a security.
In December 2022, the SEC is likely to hastily attempt to secure and protect documents from public view that Ripple believes are essential to its triumph against the regulator.
Implications of the verdict
This confrontation between Ripple and the SEC has far-reaching implications for the future of XRP. It is a tense situation that could be a landmark moment for the crypto market. In 2022, Gensler of the SEC declared that “many cryptocurrencies are securities,” indicating the agency’s plan to examine more digital assets closely.
The implications can be divided into four main categories.
The end is near
Attorney John Deaton, the creator of CryptoLaw, has been a strong supporter of Ripple against the SEC. In a discussion on June 3, he forecasted there was a 25% probability that District Judge Analisa Torres would decide in favor of Ripple and a 50% possibility of a “middle ground” decision. However, with Binance and Coinbase now in the SEC’s sights, these forecasts may need to be reevaluated.
Garlinghouse remains hopeful about the ruling, yet he feels “let down” by a regulator who provided them with conflicting advice. This feeling has been shared among the crypto community in the United States.
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The United States has historically been a prime destination for ambitious startups, a place of groundbreaking inventions and a worldwide leader in many industries. However, its attitude towards the advancement of the crypto industry is not in line with its past practice of encouraging growth through supportive regulations.
The SEC v. Ripple case is a pivotal battle that could potentially determine the course of the cryptocurrency sector in the United States, as investor assurance, legal lucidity, and intercontinental talent migration are all at stake.
The result of this could either promote a period of creativity and widespread approval of digital assets or cause a surge of market instability and a departure of U.S.-based crypto companies looking for more beneficial locations with more explicit regulations.
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