Ripple is an atypical crypto asset. The XRP case is also unusual for this reason. The probable effects are of the kind that make probability calculations. Yes, the famous SEC and Ripple case. Of course, this is not the only case involving cryptoassets. On the contrary, there are many lawsuits filed by the SEC. For those who are curious about these cases and their details, we can recommend our article Bitcoin Cases from the Perspective of Banking and Capital Markets Law published in Legal – Banking and Finance Law Magazine 2020 / 34 issue. However, the Ripple case is one that has been closely followed by the financial circles for a long time.
The case is so important that the slightest development activates the financial agencies. SEC v. Recent developments in the Ripple case, and news about these developments have started to be discussed. The case is expected to conclude soon. On this occasion, it will be useful to discuss the subject of the case and current developments together with the parties and the subject, in order to be prepared for the possibilities.
Chronology of the Sec and Ripple case
Ripple was first launched in 2012. What distinguishes it from other cryptocurrencies is that it is a payment protocol that uses blockchain technology to process international money transfers. Of course, the international money transfer area is a ring of fire. Doing a job in this field is not an issue at all. Because there are many states and companies beyond the state. While money transfer is the subject of many framework regulations, there are many monopolies and restrictions in international money transfer. Ripple has pierced this conventional structure. In this respect, Ripple has been a very ambitious cryptographic network and system since day one. If we were to ask who the big three are, we can answer as Bitcoin, Ethereum and Ripple. Other factors that make Ripple stand out are its low transaction fees and extremely fast transaction times. With this function and advantages, Ripple is a project that has managed to establish partnerships with hundreds of financial institutions at the global level in a very short time.
The company’s founders used XRP as a digital asset to raise funds in 2013. Finally, the United States Securities and Exchange Commission (“SEC”) on December 22, 2020, through an ongoing unregistered digital asset securities offering against Ripple Labs Inc, as well as its two key directors, Brad Garlinghouse and Chris Larsen. He sued for allegedly raising more than $1.3 billion. This is where the turmoil broke out.
What were the allegations?
According to the allegations made by the SEC, Ripple raised funds by selling XRP tokens in unregistered securities offerings to investors in the United States and around the world. The focus of discussion centers around the SEC’s claim that XRP is a security.
In the USA in 1946, the SEC v Howey case, one of the turning points of capital market law, revealed the Howey Test. This case and test are used to decide what falls under the Securities Act. The test is helpful in deciphering whether a transaction qualifies as an “investment contract” and therefore is considered a security. It is generally considered a security if it has no effect on the value of the asset and its change in value to investors.
On the basis of the case; The SEC claims that XRP failed the Howey Test. According to the SEC, XRP is an asset purchased by investors assuming they are investing in a joint venture. For this reason, the SEC argues that Ripple, both due to its marketing efforts and allegations of supply manipulation, has convinced investors that the XRP price will rise due to the company’s activities, which is why investors are buying XRP. Of course, Ripple does not accept these claims and the dispute is getting longer and longer. The sad thing about this case is that XRP’s model, which allows for international money transfer easily and without restrictions and high costs, is overshadowed by the case. Yet this is a financial revolution.
Ripple, in its defense against the lawsuit; He argued that they had received no notification from the SEC that XRP would be considered a security, and as a result, the SEC was biased in its application against virtual currencies. It was even suggested by Ripple that some members of the SEC have connections with platforms such as Ethereum, which is a very thought-provoking detail.
Stage of the case
Ripple defense attorney James K. Filan tweeted on Sunday, September 18, 2022, that the current CEO and former CEO of Ripple Labs made an early request for summary judgment.
The summary judgment claim is an institution specific to US judicial law. In this request, the issue concerns the fact that the dispute is based on facts. Because in the case, the SEC and Ripple are not in a dispute over the material, that is, the concrete situation. The main issue, or the question on the agenda, is whether XRP, in terms of its concrete features, is a security in the face of current legal regulations. However, over the long period of time, a legal basis has not yet been established to respond to this fundamental dispute. On the other hand, there is optimism about the possibility of a compromise, as Ripple argues that it is not an investment contract or investment instrument, which is one of the capital market instruments. US law has by far deep experience in the art of compromise. It is a sui generis tendency to preserve the win-win culture even in judgment.
Another noteworthy detail is the participation of the Digital Chamber of Commerce (“CDC”) and the way it participates in the case. Because the CDC, which is known as a crypto asset lobby in the USA, wanted to participate in the case as ‘amicus curiae’. The court accepted this request. By obtaining court-friendly status in this way, the CDC is expected to assist the court by providing information, expertise or insight. Indeed, in explaining its interest in the case, the CDC team has justly and boldly underlined the far-reaching implications of the court decision. In the CDC statement, it was emphasized that it does not have an opinion on whether the offer and sale of XRP is a security transaction. However, the CDC seems to have convincingly explained its reason for joining the lawsuit, arguing that it is interested in ensuring that the legal framework applied to the digital assets underlying an investment contract is clear and consistent.
Conclusion
The case has not been concluded yet. We are very close to the decision stage. The dominant opinion of the public is that the case will be concluded in favor of Ripple. Everyone is now impatiently waiting for the conclusion of this unduly protracted case. Another remarkable point is that the value of XRP increases with the approach of the decision. This indicates that the expectation that the case will end in favor of XRP has been bought. Although this has been priced several times before. If the litigation progresses in favor of Ripple, this may result in the SEC going to settlement as a result of the summary judgment request. The CDC’s involvement in the case also feeds the expectations that a decision will be made in favor of Ripple.
It should be emphasized once again. Whatever the decision to be made at the end of this case, the consequences and effects it will have in the fields of technology, finance and law will be huge. If the SEC wins, the adoption of XRP as a security could trigger similar cryptos to be considered securities as well. In this case, the first thing that comes to mind is Bitcoin. However, US regulators, including the SEC, agree that Bitcoin is not a security, at least for now. We will continue to follow closely as the outcome of the XRP lawsuit will set a precedent that will profoundly impact the future of crypto assets, investors, the fate of blockchain nationalism, tech innovators and the legalization trends of lawmakers around the world.
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