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Home News Analysis

Why the lawsuit against Ripple and XRP is a landmark case

byCCI
March 18, 2023
in News Analysis

Summary:

  • The US Securities and Exchange Commission (SEC) case against global payments network, Ripple Labs Inc, and XRP, the cryptocurrency its founders created in 2012, is regarded as pivotal in deciding whether or not crypto is a security.
  • More than 75,000 people, and more than 12 major crypto entities, including the Crypto Council for Innovation (CCI), have submitted statements in support of Ripple and XRP, with all but two supporting the company.
  • Read the CCI’s Amicus brief. 
SEC icon surrounded by smaller icons related to security, currency, crypto and justice. Story related to XRP cryptocurrency.

What is this lawsuit about and why is it important?

The SEC’s lawsuit centers on whether or not XRP is a security. This is important because if the ruling goes in the SEC’s favor, it potentially further defines what digital assets are considered securities in the US. This has significant ramifications for the crypto sector.

The SEC contends that when XRP was initially issued, this constituted a sale of unregistered securities. This, like an IPO, falls under the SEC’s strict regulation. The SEC’s Chairman Gary Gensler has stated he thinks the “vast majority” of cryptos are securities.

In 2018, the SEC filed a case against Ripple, and on December 21, 2020, initiated legal proceedings against the company’s CEO and co-founder, Christian Larsen. As a result, major exchanges, including Coinbase, delisted XRP a few days later.

The central question

Central to the lawsuit is the question of whether XRP’s investors were seeking to make a profit or brought into the cryptocurrency for its utility.

According to the Howey Test, referenced in several briefs, a security is by law, fundamentally speculative. Supporters of XRP argue that the cryptocurrency’s early investors did not buy XRP solely to sell for profit; rather they bought for the use case and the utility of the underlying blockchain technology. If the court determines this utility, it will set a precedent for blockchain technology and the emerging industry.

Although slightly different, this question is also central to the New York Attorney-General’s filing against KuCoin, which rests on whether ether (the Ethereum blockchain’s native cryptocurrency) is a security. Ethereum switched last year to a ‘proof-of-stake’ blockchain network, where investors can stake their coins in exchange for rewards. This is, it is being argued, not dissimilar from the interest paid on bonds.

What is “proof of work” or “proof of stake”?

The response to the case

More than a dozen crypto-related companies and associations – including the CCI – filed amici curiae in support of Ripple, which Garlinghouse described as an “unprecedented” number.

Along with the CCI, the following have submitted statements in support of Ripple:

  • The Blockchain Association
  • The Chamber of Digital Commerce
  • Coinbase
  • Cryptillian Payment Systems
  • I-Remit
  • ICAN
  • Paradigm
  • Reaper Financial
  • Spend The Bits
  • Tapjets      
  • Valhil Capital      

In addition, through class action, thousands of investors (note James K. Filan’s work linking many of these statements) filed a brief in support of Ripple.

Briefs and counter-briefs

“The implications of this case could reverberate throughout the digital asset ecosystem,” said the CCI in its filing. Before continuing:

“This regulation-by-enforcement approach departs from the principle of meaningful public participation in agency decision-making, deprives market participants of fair notice as to what conduct is permissible, and risks curtailing innovation and investment in this cutting-edge sector of the economy.”

Shortly before the November 11 filing deadline, two companies came out in support of the SEC, and tighter regulation, namely The New Sports Economy Institute (NSEI) and fintech firm InvestReady.

According to InvestReady’s CEO Adrian Alvarez he wanted “… to make the case for regulation and clarity for this industry. The brief includes analysis on why I think it’s a no-brainer that XRP was a security when it was first sold, as was ETH by the way, as well as how ETH is now clearly a commodity and XRP is close but not quite decentralized enough.”

Meanwhile the NSEI suggested that: “Cryptocurrency is like a chameleon engaging in regulatory arbitrage, branding itself as an asset when it wants to attract capital and appeal to ‘investors’, but a currency when it faces regulatory scrutiny.”

The CCI’s position

The CCI firmly supports XRP, utility, and innovation. As noted in our statement:

“As a coalition of industry leaders with substantial expertise in the crypto space, the CCI has a vital perspective to offer on these issues – issues that are profoundly important not only for digital asset holders, but also for the developers, operators, and investors that are building the crypto ecosystem.”

A SEC victory would set a precedent that would hamper the crypto industry. If Ripple wins this case, it could offer new impetus to XRP allowing it to function in line with its design.

Amicus Brief Filed in SEC Lawsuit Against Ripple
Read CCI’s amicus brief in the case against Ripple

Background to Ripple and XRP

Ripple is a decentralized payment transfer network, based in San Francisco. XRP is a cryptocurrency designed to facilitate trillions of dollars in bank-to-bank transfers. 

XRP seeks to address and streamline transactions known as SWIFT payments, which are international – and often very large – bank-to-bank transfers. SWIFT is a global banking system, with more than 11,000 financial institutions in 200 countries. It handles a huge amount of money, estimated to stand at $5 trillion per day, which totals more than $1.25 quadrillion per year.

Those supporting XRP see a future where transactions that currently go through SWIFT instead use XRP, which would send the current $23 billion market cap skyrocketing on adoption.

Tags: amicus briefcarouselcryptopolicyripplexrp
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