How The Ripple v. SEC Lawsuit Could Affect The Entire Crypto Industry: A Lawyer’s Take

With the US Securities and Exchange Commission (SEC) launching a full-blown offensive against cryptocurrencies this year, the ongoing lawsuit against one of the agency’s premiere industry targets – Ripple – remains as prevalent as ever.

Due to recent developments, many parties close to the case believe that a court ruling may be imminent. How the outcome of the Ripple v. SEC on the crypto market and the regulatory landscape as a whole?

Let’s dig deeper.

Abstract: Ripple v. SEC

In December 2020, the Securities and Exchange Commission Accused Ripple and its top executives — CEO Brad Garlinghouse and former CEO Chris Larsen — conducted an unregistered securities offering worth $1.3 billion in the form of XRP, dating back to 2013.

The lawsuit caused the price of XRP to plummet at the time, and incited several cryptocurrency exchanges to delist the asset in order to remain compliant with federal securities laws.

But Ripple did not back down. According to Garlinghouse, the company has spend nearly $200 million to defend itself from the SEC’s allegations. The company’s primary argument is that XRP itself is not a security or investment contract, but rather a digital currency that is used to facilitate cross-border payments.

Garlinghouse expressed trust Last month it was reported that the case could be drawing to a close in a few weeks – meaning its solution could be announced any day now.

Who is correct?

To date, the US Congress has not passed any legislation defining how crypto-assets should be classified by law – whether as securities or commodities.

The country’s main market regulators — the Securities and Exchange Commission and the Commodity and Futures Trading Commission (CFTC) — disagree on the matter, with the former apparently believing that all cryptocurrencies besides Bitcoin are securities.

SEC Chairman Gary Gensler keeps a tight lip when asked to publicly discuss which specific cryptocurrencies are securities. Instead, he often refers the industry to the Howey test — a decades-old legal standard for determining whether financial assets qualify as investment contracts, and thus as securities under the Securities Act of 1933.

There are four pillars to passing the Howey test:

1. Invest money…
2. In a joint venture…
3. With the expectation of profit…
4. To draw from the efforts of others.

Industry leaders such as Ripple often challenge the SEC’s interpretation of the Howey test when applied to digital assets. For example, Coinbase Argues Stablecoins like BUSD issued by Paxos (which the SEC claimed as a security this month) are not investments, as their value remains “stable” through time.

What do lawyers think about XRP?

John Deaton – Founder of Crypto Law.US – Attorney representing more than 75,000 XRP holders in Ripple’s lawsuit against the SEC. He strongly opposes the SEC’s stance, asserting that XRP is not a security, and that Gensler should be fired from his position.

So when you take all the laws into account, the SEC has nothing to support its theory that secondary market sales are also securities. Some would argue that the SEC has the right to pursue new theories that are not supported by law. I disagree.

– John E. Deaton (@JohnEDeaton1) June 19, 2023

Sandy Seth — a patent attorney for 25 years — also expressed skepticism in the SEC case on Twitter Monday, arguing that XRP does not meet all the requirements of an investment contract under Howey. Although he is not a securities attorney by profession, Seth received an analysis praise of Deaton as “as good or better than any company of mine or anyone else’s.”

Talk to Seth Potato encryption This week about his case against the SEC, and what implications the lawsuit has for the entire industry.

“The most important prerequisite for securities is the instrument that proves the existence of a financial stake in a joint venture, as the Howey contracts did,” he said. By contrast, the SEC has “falsely” attempted to overturn this requirement.

His claims are in line with Deaton’s who has done so more often He said Ripple’s success as a company is not necessarily related to XRP’s gains or losses in the market.

Seth said he hoped the SEC wasn’t “bluffing” with Howey’s interpretation of the SEC, finding that none of the contracts under which Ripple sold XRP were securities, as they “conveyed no interest in a joint venture.”

Hinman emails

Another common argument for Ripple is that the crypto industry has received wrong and contradictory guidance from the SEC on how to classify digital assets. They cite as an example a 2018 letter from former commissioner William Hinman, in which he described how cryptocurrencies that were once commodities can turn into securities, among other parameters.

Earlier this month, the SEC had to leak internal communications about the letter. The emails revealed that Hinman posted the letter despite receiving multiple warnings from fellow agency members that the letter could confuse readers about what characteristics count as a security item.

While showing evidence of possible SEC corruption, Seth said these emails were likely just a “red hoax”.

“The fair notice defense is *not* involved (if the court rules, as it should, that neither the XRP itself nor the Ripple contracts under which it was sold were investment contracts),” he explained.

What does this mean for cryptocurrency?

Like many in the cryptocurrency industry, Seth believes that the ruling in favor of Ripple can “make it clear in one fell swoop” that the SEC does not have broad authority over the crypto industry.

This would effectively shield crypto companies from the agency’s future enforcement actions until the clarifying legislation is passed in Congress. Until then, another agency — such as the CFTC — could take over.

The Securities and Exchange Commission (SEC) sued cryptocurrency exchanges Binance and Coinbase this month, alleging that more than a dozen cryptocurrencies listed on their platforms were securities in the process. Several of these coins — including Cardano (ADA) and Solana (SOL) — have sold off and behaved in a similar manner to XRP, and suffered losses similar to XRP following the SEC allegations.

Seth is a cryptocurrency investor himself, who spent months coming to his conclusion on the case after reading summary ruling filings with the Securities and Exchange Commission.

“Through bogus enforcement actions, the SEC intimidated the crypto industry,” he said. “The SEC has been harming cryptocurrency investors and what it knew best was harming investors when it filed these lawsuits.