SEC vs. Ripple: Dissecting the Complexities of the XRP Lawsuit

• Landmark ruling: XRP is not inherently a security, but Ripple’s institutional sales were.
• SEC vs. Ripple lawsuit ongoing: SEC pursues remedies, Ripple counters, potential settlement looms.
• XRP’s price impacted: Rally followed ruling, future hinges on lawsuit outcome.

The SEC vs. Ripple lawsuit is arguably the longest and most discussed court case in the cryptocurrency industry. What began as regulatory enforcement by the Securities and Exchange Commission (SEC) has evolved into a protracted battle that could shape the regulatory landscape for crypto for years to come.

As the SEC vs. Ripple case appears to be nearing its conclusion, the crypto community is keenly focused on the impact the lawsuit’s outcome will have on XRP, the blockchain token adopted by Ripple for facilitating transactions. The litigation has taken a toll on XRP, with the altcoin struggling to recover from a significant price dip shortly after the lawsuit began.

In this article, we delve into the key aspects of the SEC vs. Ripple court case, exploring the SEC’s motive, how it began, the link between the involved entities and XRP, and the litigation’s impact on the once-vibrant crypto token. But before we dive into the details, let’s define the major players: the SEC, Ripple, and XRP.

U.S. Securities and Exchange Commission (SEC): The U.S. government’s oversight agency responsible for regulating the securities markets, with the primary goal of protecting investors and maintaining fair, orderly, and efficient markets.

Ripple: An American-based FinTech company, founded by Chris Larsen and Jed McCaleb focusing on payment protocols and exchange networks. Founded in 2012, Ripple is involved in payment settlement, asset exchange, and remittance.

XRP: The native cryptocurrency of the XRP Ledger blockchain, designed for secure storage of transactional data with distributed consensus. XRP functions as a bridge currency for transactions covering multiple crypto assets and networks between businesses.

Now that we have defined the entities, here is the link between them:

Ripple, the FinTech company that facilitates financial transactions, adopted the XRP Ledger, powered by XRP, for its operations. Meanwhile, XRP serves as a bridge currency in the system, enabling Ripple to carry out its functions. It is worth noting that Ripple founders are the same developers who created the XRP Ledger and the XRP token.

The Litigation Begins

In 2020,  the SEC sued Ripple and two of its executives, Brad Garlinghouse and Chris Larsen, for selling unregulated securities worth over $1.3 billion to the public. According to the lawsuit, the SEC accused Ripple of not filing a registration document, required for companies seeking to raise capital from the public. In addition, the regulator said Ripple shared limited information, thereby creating an “information vacuum.” The SEC’s allegations indicted Ripple of conducting an ICO during its fundraising exercise.

In response to the SEC’s allegations, Ripple denied conducting an initial coin offering (ICO) or raising funds in the manner typical of such procedures. They argued that ICOs involve newly minted tokens, while their fundraising involved XRP, an already-circulating asset tradable on exchanges.

The XRP lawsuit sparked debate within the crypto community, with many closely observing the case to understand the government’s approach to crypto regulation. The central question was whether XRP constituted a security, with the SEC arguing in the affirmative due to Ripple’s sales practices.

The XRP lawsuit lingered for several months, raising debates among crypto community members, many of whom keenly observed the litigation process, aiming to understand the government’s idea of blockchain and crypto regulation. It became arguably the most high-profile crypto regulation case with the central question on whether XRP constituted a security, with the SEC arguing in the affirmative due to Ripple’s sales practices.

A Landmark Judgment in Favor of Ripple

On July 13, 2023, Judge Analisa Torres of the Southern District of New York issued the first court decision broadly addressing the classification of XRP. In her ruling, Judge Torres subjected Ripple’s XRP sales to the Howey Test. The test provides that an “investment contract” is a “contract, scheme or transaction” whereby a person invests money in a common enterprise and is led to expect profits from the essential managerial efforts of others which affect the success or failure of the enterprise.

Judge Torres ruled that XRP as a digital asset, does not qualify as a security. Hence, is not subject to the SEC’s requirements for which it accused Ripple of engaging in asset sales without fulfilling the required procedures. However, the Judge assessed each of the institutional sales, programmatic sales, and other XRP distributions by Ripple based on the totality of the facts and circumstances of each contract, transaction or scheme.

Following her assessment, the Judge found only the institutional sales to meet all the Howey Test conditions, thus becoming the only sales that qualify as investment contract. The ruling appeared as a partial victory for Ripple, reflected in a surge in XRP’s price, as the cryptocurrency supporters considered the victory in court a bullish indicator and a step in the right direction.

Court Denies The SEC’s Motion to Appeal

The SEC hit a brick wall once again when Judge Torres denied its interlocutory appeal challenging the court’s holding that Ripple’s programmatic sales of XRP on secondary trading platforms were not securities transactions. Denying the motion, Judge Torres clarified that her ruling was based on the specific facts of Ripple’s case and did not imply that all secondary market sales of digital assets are exempt from securities laws.

Notably, in denying the SEC’s motion to appeal, Judge Torres clarified that the court’s judgment in Ripple’s case is based on the facts provided by the FinTech company’s programmatic sales. She emphasized that the judgment does not imply that offers or sales of digital assets on secondary trading platforms could never constitute securities transactions.

Meanwhile, in October 2023, the SEC dropped all charges against the two Ripple executives, Brad Gralinghouse and Chris Larsen, but continued seeking remedies for the purported sale of unregistered securities. The XRP community considered this another milestone and an indication they may be having an upper hand in the ongoing litigation. However, the SEC insists that Ripple’s gains were ill-gotten, pushing arguments to support its claims.

Ripple vs SEC Current Situation

It is crucial to note that both Ripple and the SEC scored partial victories in the July 2023 judgment. While secondary XRP sales were deemed not to be securities, transactions with institutional investors were deemed to be so. Despite being denied an appeal, the SEC has continued to pursue its case through remedies filings, seeking hefty fines from Ripple. The potential fine amount has been a subject of speculation, with many in the crypto community expecting a settlement.

For most of 2024, the SEC has carried out remedies filings, seeking to attract hefty fines from Ripple. The extent of the potential fine has been a subject of speculation among crypto community members, with most of them concluding a fine is inevitable. On its part, Ripple continues to counter the SEC’s arguments, filing counter remedies when necessary, even though most crypto community members think the case is in its concluding stages.

Though referred to as a fine, many crypto community members consider the idea a potential settlement and a cordial way to conclude the protracted case that may have halted XRP’s development. However, some cryptocurrency stakeholders don’t see it in that light. One such personality is the renowned crypto lawyer, Bill Morgan, who thinks a settlement is unlikely to happen, and in the event it does, Morgan considers it a compromise, not a win.

Impact of the Litigation on XRP

The protracted court case has hindered XRP’s development. The altcoin, which featured among other top cryptos like Bitcoin and Ethereum in the early crypto days, has failed to achieve the initially projected heights. The setback results from dwindling bullish sentiments and lasting uncertainty about the crypto’s future amid regulatory concerns.

Observedly, the impact of the court case on XRP is evident in XRP’s price action, especially during the court case’s milestone moments, like the July 2023 ruling by Judge Torres. Hence, most analysts predict that a favorable conclusion, such as a minimal fine for XRP, could positively impact the altcoin’s price, and could trigger a significant rally for XRP.

XRP’s historical behavior aligns with the community’s expectation, as the altcoin’s price chart reveal’s three significant rally periods in its lifetime. The first and most significant XRP rally happened during the 2017-2018 bull-run, coinciding with Ripple’s token sales. XRP surged over 19,000% during this period, reaching an all-time high of $3.317.

TradingView’s data shows that XRP’s second price surge happened during the 2021 bull run, in the early period of the court case. The price rallied over 1,600% to reach $1.97, after dropping to $0.114 during the previous bearish trend. Meanwhile, Judge Torres’ July 2023 judgment triggered the third and most recent XRP rally that saw XRP surge 108% over a short period.

Expectedly, many XRP supporters expect the crypto token to embark on a significant price surge in the event of a favorable settlement. The altcoin traded for $0.57369 at the time of writing, after retracing 15.38% from a recent rally.