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Explained- The battle between SEC and Ripple

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Pavan A Follow

INDIA

Jun, 11 2021

Jun, 11 2021

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A promising cryptocurrency XRP, which has ties with Ripple is facing a hard time with its value plummeted. Ripple has been in the news for all the wrong reasons--the case between Ripple and SEC has been going on for a long time and is not going to end anywhere soon.

 

Recently blockchain-based digital payment company had an upper hand in the court battle and according to legal experts, the final judgement would be in favour of Ripple.

 

The beginning

 

XRP is the native cryptocurrency that was created by ripple labs and XRP is on the top 10 cryptocurrencies by market capitalization. The main goal was to make sending money with ease over the Ripple network, which is not the case in traditional currency transfers which are slower and attract a transactional fee.

 

In 2012, Ripple created a system to send money over the network as quickly as possible in three to five seconds instead of three to five business days and to reduce the fee for international transfers. XRP token, which is used for representing a value on the ripple network isn't actually being mined, so there is very little environmental concerns for this digital currency. It facilitates transfers of money between different currencies when compared with the current settlement method which just converts everything to us dollars and that takes time and incurs conversion fees.

 

But why is SEC after Ripple?

 

XRP the token was created with exactly 100 billion tokens in mind. In the beginning, 80 billion went to ripple labs and 20 billion went to the three founders. Over time, the 80 billion XRP token that ripple labs had control over will be slowly released to the public released in a certain interval of time and at a predetermined rate.

 

With Ripple owning most of it, SEC in 2020 alleged that XRP is not a currency you can mine but instead, a security and Ripple labs actually have control over most of it.

 

SEC has alleged that Ripple co-founders have raised capital to finance their business operations and exchanged XRP tokens for non-cash considerations, so basically, it’s like stock or equity rather than a currency. 

Since it's considered as a stock or equity by the SEC, it will have jurisdiction over it and the lawsuit states that they should have filed XRP as a security. The court battle has been going on since December 2020, which resulted in XRP getting de-listed off of many major exchanges including Coinbase.

 

                              Ripple VS SEC

 

December 2020

 

On December 2, the Securities and Exchange Commission files a lawsuit against the digital payment company Ripple, which alleged that the company and executives sold and distributed $1.3 billion worth of unlicensed securities without registering. The lawsuit named Ripple CEO Brad Garlinghouse and cofounder Chris Larsen as defendants. 

 

The lawsuit impacted trading with some coming to a complete halt, and the value of the XRP was reduced by 25%. The Ripple sues SEC in return with Ripple CEO Brad Garlinghouse calling SEC’s action “shocking and an attack on the entire cryptoindustry and American innovation.”

 

 

January 2021

 

After the legal action by SEC, Coinbase, the biggest cryptocurrency exchange in the U.S stops selling XRP alleging that Ripple sold virtual tokens without registering them and misleading the investors.

 

This is followed by Tetragon financial group, the lead investors suing Ripple for misleading them by improperly selling over $1 billion of the XRP token.

 

Tetragon filed the complaint seeking to "enforce its contractual right to require Ripple to redeem" Series C preferred stock and wants to block Ripple from using any cash or other liquid assets until the payment is made, as per the report. In addition, Tetragon has also moved for a temporary restraining order, a preliminary injunction and an expedited trial in the court.

 

In the statement, Ripple said “We are disappointed that Tetragon is seeking to unfairly take advantage of the lack of regulatory clarity here in the U.S.” Ripple further added, “The courts will provide this clarity and we are very confident in our position.”

 

On January 29, In its 93-page filing responding to SEC’s allegations, Ripple stated that “The functionality and liquidity of XRP are wholly incompatible with securities regulation. To require XRP’s registration as security is to impair its main utility,” 

 

Ripple firmly disagrees with SEC’s argument that XRP is a security or investment contract. Amid the legal fight, Ripple has filed a new motion asking the SEC to disclose its internal documents related to bitcoin and ethers since the two virtual currencies are closely comparable to its own XRP. 

 

The request is based on the Freedom of Information Act (FOIA), a law that permits the public to demand non-classified documents from federal agencies to promote transparency in government. 

 

March 2021

 

Ripple’s executive chairman Chris Larsen has asked a U.S. court to dismiss the SEC case over XRP sales because SEC has failed to show any wrongdoings.

 

On March 8, both MoneyGram and Ripple jointly decided to conclude their partnership and “are both committed to revisiting our relationship in the future.” They did not specify the reason for this, but this comes after MoneyGram suspended trading on Ripple's platform over the ongoing court proceedings between Ripple and SEC. MoneyGram was also subjected to a class-action lawsuit for its use of XRP. 

 

The Securities and Exchange Commission on March 17 in a court letter has asked permission to access the personal financial records of Ripple by giving three reasons for the same. The three relevant reasons were given by SEC to seek these data, as per the document:

 

1)   It said, individual Bank records are the only way to know their movements on XRP and the amount raised from their XRP sales to the public because XRP transactions are pseudonymous in nature.

2)   The data will show whether the execs personally funded efforts to increase the value of XRP

3)   They are going to show how much the execs “enriched themselves relative to other income, which bears on the powerful, personal financial motivation they had to look the other way when confronted with the legal consequences of their conduct.”

 

Responding to this, Lawyers representing Ripple has asked the court to squash the subpoenas sent to a group of banks for personal financial information.

 

In a new ruling, a U.S. district court judge has allowed XRP holders to join Ripple as a third party in fighting the SEC lawsuit to ensure that the interests of XRP holders were “fully and vigorously defended.” 

 

According to the pre-motion filed by XRP holders, which said, “By alleging that XRP sold and/or distributed by Ripple — in the present day — are unregistered securities, the SEC is implying that all XRP constitute unregistered securities, including the XRP in the accounts of the XRP holders,” It further stated that XRP holders have suffered “catastrophic losses” and economic damages up to US$15 billion.

 

April- Present

 

In a twist of events, the Judge in the United States has dismissed the SEC request, which would be required senior executives at Ripple to divulge their personal financial records to the court. Ripple executives had earlier asked the court to intervene in this matters, which they described as a “wholly inappropriate overreach” from the SEC.

 

As per reports, Judge Sarah Netburn of New York’s Southern District may order sanctions against SEC or dismiss the case for not complying even after repeated requests by the court on April 6 and May 6. SEC has been refusing to produce the internal documents regarding cryptocurrencies BTC, ETH, and Ripple’s XRP.

 

Presently, Ripple is looking forward to going public with the IPO, and is more than confident about it after Coinbase’s success in the IPO with capitalization hitting $100 billion in a day. Ripple's CEO had talked about a potential IPO for Ripple several times but the ongoing court battle with the securities regulator has only slowed downed the process. After the news of Ripple going public reached the mainstream media, the price of XRP tokens jumped 15%. This was clearly a move to stir interest for the forthcoming IPO.

 

 

The future of Ripple

 

As per reports, Dugan Bliss, the attorney with the SEC is moving to withdraw himself from the case and will no longer work for the regulator. He has been waiting for permission from the court for the same.

 

Meanwhile, Ripple after several legal victories, the XRP growth has been exponential with trading up about 8%. This shows Ripple will continue making payments efficient and easy. If the U.S. authorities remain unclear, the company has threatened to relocate to other countries and has already shortlisted five potential destinations.

 

 


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Pavan A

CBW - External Analyst

INDIA

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