Explained- The battle between SEC and Ripple


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.

Pavan A
CBW - External Analyst
INDIA