In December 2020, the Securities and Exchange Commission (SEC) started legal action against Ripple Labs for selling XRP as an unregistered security. The SEC vs Ripple lawsuit could significantly impact the crypto industry as a whole, depending on its outcome. It’s hardly an exaggeration to call it the crypto lawsuit of the century.
If Ripple wins the case or manages to negotiate a good deal with the regulator, other companies, crypto projects, and their communities could take heart. At the same time it would be too early to pop the champagne, as there are signals that the SEC has more crypto projects in its crosshairs.
The present state of affairs (October 2022) is that both parties have filed their motions for summary judgment. In non-technical terms, what they’re saying to the court is, you have the information, make the decision without going through a full trial. A quick verdict will help all parties: the case has been dragging on too long!
To Be A Security or Not To Be
The heart of the matter is whether XRP is a so-called security or not. If so, then Ripple would have breached the securities laws. Issuing a security comes with all kinds of regulatory requirements.
The American SEC uses the so-called Howey Test to determine what qualifies as an “investment contract” and would therefore be subject to U.S. securities laws. An investment contract exists if there is an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”
Bitcoin is not considered a security by the SEC, but instead a commodity. The SEC recognizes the fact that there is no ‘CEO’ of Bitcoin. The power over the Bitcoin network is sufficiently decentralized.
Since most crypto currencies were issued with ICO’s, where founders sell what is in a sense equity to early investors (and keep some coins for the top execs), there are tons of crypto projects that have this danger of being considered an unregistered security looming. Ethereum was wise enough to contact the SEC. In 2018, the SEC expressed the view that Ether is not a security. Ripple contends that sales of XRP were no different from sales of ETH by the operators of the ethereum blockchain.
On the other hand, there are many differences between securities and crypto coins. Owning a crypto token gives you no claim on a protocol’s assets. Nor any claim on either current or future cash flows. Not in the same legal sense as proper securities. The SEC just cares so much because crypto being a security would grant them huge power: it’s their domain.
Background of XRP/Ripple
Ripple is the name of the company and payment protocol, while XRP is the native currency. Ripple is used as a settlement system, currency exchange and remittance network. Creator Ripple Labs Inc. is a US-based tech company, now simply called Ripple.
It’s important to reiterate a few differences between XRP, and e.g. BTC and ETH,
- XRP is backed by a company. Ripple has been issuing shares and made it clear it wants to go public.
- Another difference with BTC and ETH is that XRP Ledger doesn’t use proof-of-work nor proof-of-stake. Instead, the XRP Ledger is maintained by independent participants that have to be approved first. It’s not permissionless like Bitcoin and Ethereum. It relies partly on trusting the validators, contrary…
Erik started as a freelance writer around the time Satoshi was brewing on the whitepaper.
As a crypto investor, he is class of 2020. More of a holder than a trader, but never shy to experiment with new protocols.
