Global regulatory frameworks for Bitcoin and other cryptocurrencies will be impacted by the SEC v. Ripple litigation. The XRP situation is described.
Nobody foresaw the SEC vs. Ripple litigation, one of the most famous legal fights in blockchain history, when the XRP coin was introduced in 2012. Ripple was one of the biggest digital assets in the cryptocurrency industry long before Ethereum was even a glimmer in Vitalik’s eyes.
For years, the SEC vs. Ripple Lawsuit has dominated the cryptocurrency news. Crypto fans have become used to the struggle over time. Not only will the outcome of the SEC lawsuit affect XRP, but also BTC, ETH, and the whole crypto ecosystem.
Why is Ripple Labs the target of the US Securities and Exchange Commission? What is the Supreme Court’s current ruling on XRP holders, and what can we anticipate for the future once the dust has settled?
XRP, or Ripple, is what?
The Ripple blockchain is a decentralised digital payment mechanism, similar to Bitcoin. When it was first introduced in 2012, Ripple sought to be a quick and inexpensive method of sending different fiat currencies across borders.
The Ripple network’s native coin, XRP, is utilised to cover transaction costs. When it was launched, Ripple was hailed as an appealing choice for banks and other financial organisations wishing to send money abroad without having to deal with challenging remittance problems.
Examining the SEC v. Ripple litigation
The SEC’s complaint against Ripple Labs and two of its executives, CEO Brad Garlinghouse and co-founder Chris Larsen, is referred to as the “XRP litigation” in official documents. Judge Analisa Torres of the District Court of New York is in charge of the case.
But what accusations are the SEC and its unmovable chairman Gary Gensler levelling against Ripple? Why should XRP be subject to the full weight of the SEC’s jurisdiction when thousands of people sell and trade cryptocurrency tokens on secondary markets every day?
Charges Leveled Against Ripple (XRP)
The SEC accused Ripple Labs of successfully generating over USD 1B through sales of XRP tokens in 2020, which led to the beginning of the largest regulatory lawsuit involving the cryptocurrency sector. If you’ve been following cryptocurrency for more than a week, you presumably already know that Initial Coin Offerings (ICOs) like these are rather prevalent.
The SEC’s main complaint is that Ripple Labs and its officials allegedly conducted unregistered securities offerings by giving investors XRP tokens. According to the SEC, XRP is not a “currency” but rather a “security” and is thus governed by securities regulations.
The CEO and co-founder of Ripple allegedly lied about the sale, according to the SEC. They contend that Garlinghouse and Larsen broke federal securities laws by making false, deceptive, and outright false claims regarding the XRP coin and by failing to properly register the transaction.
Last but not least, Gensler & Co. assert that Ripple Labs made the decision to withhold this information from its investors while knowing that XRP should be recognised as a securities. The Ripple side contends that XRP is a money rather than a security and should not be subject to securities rules.
It would seem that this protracted legal dispute ultimately comes down to a game of terminology. Maybe, two words will determine how cryptocurrencies are regulated in the future. Is XRP better categorised as a currency or a security?
More importantly, what exactly is a security?
The Howey Test
The Supreme Court created a process for determining whether an asset qualifies as a security in 1946. The following criteria must be met for a security to pass the Howey Test:
- A Financial Investment: According to the Howey Test, a financial investment must really be made in return for an investment opportunity. A slightly ambiguous phrase, “funds” might apply to both cryptocurrency and fiat money.
- Contract for investment made in joint venture: The investment is made in a joint venture. This suggests that customers gather their money to benefit from a joint venture.
- The investor purchases the security with the expectation of profit, which means they do so with the aim of seeing a return on their investment.
- resulting from the work of others: The last stipulation emphasises that all gains are derived through the labour and initiatives of others.
According to the most basic definition, your asset is a security if you invest money in a company with the intention of making money off of other people’s labour. The paradigm used to determine whether the XRP coin is a security is known as the Howey Test.
The XRP coin, according to Ripple Labs, is not a security. As XRP is a currency and cannot be governed by the Securities Act, Ripple contests the accusations brought against them.
The SEC’s incorrect description of the XRP coin, according to Ripple, is the cause of the whole legal dispute, and the ICO was not an unregistered securities sale. Ripple says the SEC regulates cryptocurrencies inconsistently and stifles a creative and forward-thinking business, which only serves to aggravate the situation.
Why the SEC Lawsuit Is More Important Than Just Ripple
The decision of the SEC vs. Ripple lawsuit will have significant repercussions for the whole bitcoin market. Even if you don’t own XRP, the outcome of the XRP litigation is anticipated to alter how cryptocurrencies are governed in the US. Blackswan occurrences like Sam Bankman Fried’s crypto exchange FTX’s stunning collapse have further strengthened the SEC’s case against cryptocurrency.
Bloomberg and other Fintech observers predict that the lawsuit will be resolved in the first half of 2023.
What will occur if the SEC triumphs?
Imagine if the SEC wins the lawsuit and the Supreme Court rules that XRP qualifies as a security. In that scenario, it’ll probably establish a standard for how cryptocurrencies like Ethereum are governed. Top exchanges like Kraken were forced to discontinue their staking services and pay $30M in fines as a result of the SEC’s crackdown on token staking.
Ripple Labs would probably have to answer for their actions and pay hefty fines. Selling unregistered securities to investors in return for money would result in these penalties.
That won’t be good news for XRP if the SEC wins the action, unfortunately. Ripple Labs’ reputation would take a serious hit, and the network could find it difficult to draw in new members.
The SEC vs. Ripple case has received a lot of attention, and regulators and politicians from all across the world are awaiting a resolution. The outcome of the Ripple case will have an effect on how cryptocurrency is taxed and regulated wherever you live.
What will happen if Ripple triumphs?
Future legislation may classify the XRP token and the majority of other cryptocurrencies as currency rather than securities if the Court rules in Ripple Labs’ favour. In the US, cryptocurrency would not be governed by federal securities laws. This choice may be adopted by policymakers everywhere, resulting in more lenient conditions for crypto laws everywhere.
It’s possible that Ripple may become much more well-liked among cryptocurrency traders and investors. Ripple Labs would have a rebuilt and improved reputation in the cryptocurrency industry, and the black cloud that has dogged the Ripple network since 2020 would finally vanish.
The SEC Lawsuit’s Impact on XRP Growth
There is no denying that the SEC prosecution against Ripple has hurt the development and use of the blockchain. Because of the anxiety, apprehension, and scepticism the claims stoked, XRP’s price struggled to match those of its rivals in prior market cycles.
The Ripple case put pressure on even prestigious exchanges like Coinbase. The well-known exchange removed the XRP coin from its list in January 2023.
On the other hand
Regardless of the outcome of the XRP litigation, cryptocurrency legislation has to be addressed in order for the sector to develop. The general public and institutional investors are deterred from investing in the market by all the unresolved questions about whether cryptocurrency is a security or currency.
Why You Should Care
The outcome of the Ripple lawsuit will have a significant impact on how cryptocurrencies are handled and regulated. Although while this is only formally related to US legislation, other governments across the world will certainly follow the SEC’s lead and approach cryptocurrencies similarly.
Why is it now unable to buy XRP?
XRP has been removed from numerous cryptocurrency exchanges, including Coinbase, as a result of the lawsuit filed by the U.S. Securities and Exchange Commission against Ripple Labs and its founders.
XRP Is a Securities in the SEC’s Eyes for What Reason?
The Howey Test’s definitions and standards for securities are what lead the SEC to conclude that the XRP coin qualifies as a security.
Why is XRP such a Big Deal?
Future regulation of more cryptocurrencies by the SEC as securities is probable if Ripple loses the SEC lawsuit. Also, Ripple Labs would have to pay fines and penalties, and the network’s market value would probably be harmed.
What Would Happen If Ripple Fails the SEC Exam?
Because the outcome of the SEC vs. Ripple case is anticipated to have long-lasting repercussions on how cryptocurrencies are regulated in the United States, XRP is significant. The United States is seen as a global leader in this area, therefore how it controls cryptocurrencies may be imitated elsewhere.