The SEC vs Ripple Labs. Everything you need to know

The SEC vs Ripple Labs. Everything you need to know

A New York court may mark a before and after in the cryptocurrency market. The Southern District of New York has been studying for months a lawsuit by the U.S. supervisor, the SEC, against a company, Ripple Labs, for its role in selling one of the largest cryptocurrencies, XRP. Here are the highlights of the ongoing lawsuit, including the most recent developments.

This process comes at a critical moment when regulators worldwide have spotlighted bitcoin and other digital currencies due to their exponential growth: they already manage 1.8 trillion euros in assets. The SEC's counterpart in Spain, the CNMV, is preparing a circular to regulate the advertising of crypto assets. The European Commission (E.C.) is finalizing a directive that will hold their activity, known as MiCA. Therefore, any legal earthquake that occurs in the United States could have short shocks in Europe.

The crypto sector is optimistic that there will be firewalls even if the SEC wins: "Countries are regulating and making clear what a 'token utility and a 'token security' are, and the E.U. makes clear in its MiCA standard what the concepts and obligations of this type of 'tokens' are. Once it is published, cryptocurrency companies will know what to expect according to the legislation and regulations in each country at any given time. What happens with this SEC lawsuit against Ripple will not impact the rest of the countries in the world and will not set a precedent. If we want to have the same equality as in other sectors, cryptocurrencies need their regulation," says Herminio Fernández, CEO of Eurocoinpay.

The SEC filed its lawsuit against Ripple late last year, accusing the company of covering up with XRP what should have been an IPO regulated by the exchanges. This lawsuit is a technical discussion that could have significant repercussions for the sector in case of a victory for the supervisor, as it would open the door to control part of the world of crypto assets.

Media process

This lawsuit is making big headlines in the U.S. press. First, his suit caused a plunge in XRP, which has already recovered in the face of bets that the court process has no implications. Supervisors have long been targeting ICOs (Initial Cryptocurrency Offerings) on suspicions that the companies behind them promise appreciation to their buyers, rather than utility as currencies. Bitcoin and ether have been spared for the moment in the face of certainty that they are decentralized. But the SEC filed the lawsuit against Ripple because of the influence it exerts over XRP.

The key to this process lies in what is known as the Howey Test, which determines that an asset must be evaluated as a security, with all that this implies, if there is a claim by the investor to obtain an economic return through the work of a third party. In that case, the asset must be subject to all the regulations that shares and bonds have for their sale to small investors. During the judicial process that is being followed in New York, Ripple executives have disassociated themselves from the creation of XRP, something that the SEC denies, who remember that this crypto asset is considered a currency in Japan, Switzerland, and the United Kingdom, and accuse the supervisor of having double standards after one of its executives defended in 2018 that bitcoin and ether are not securities.

This trial recently concluded the discovery phase, and it is expected that in the coming months, both Ripple and the SEC will lay their cards on the table. This ruling will be seen in the market as a benchmark for this young industry.

Regulation

Pending jurisprudence, Spanish supervisors and regulators accelerated action on crypto assets last year. "Regulation of the crypto assets field is irremediably necessary, as long as the rules of innovation are respected. Initial Cryptocurrency Offerings (ICO, STO, IEO, etc.) must have a regulatory framework to protect the investor. Still, also regulators must understand that the rules were not marked at the time of the issuance of such offerings. There must be a point of flexibility when regulating the current market players, who innovated in a framework of lack of regulation in this regard or even used legal loopholes," says Daniel Santos Córcoles, CEO of Woonkly Labs, a company dedicated to the creation of blockchain projects whose specialty is to promote the regulation, transparency, and traceability of digital finance.

"The future, from our point of view, is neither centralization nor decentralization; it is the mix of both; when innovation and regulators go hand in hand, we can see the beginning of a new world, a more transparent financial system, and an unprecedented explosion of entrepreneurship and new technologies," adds Santos of Woonkly Labs.

Ripple between the sword and the wall

Participating in the lawsuit brought by the U.S. Securities and Exchange Commission (SEC), Ripple's lawyers confess they don't know how to resolve the dispute. They are hopeful that the new SEC director, Gary Gensler, will be reasonable and drop the lawsuit. Earlier, the latter had expressed the intention to support the innovations.

Last Friday, Fox reporter Charles Gasparino spoke with Ripple's lawyers and learned that they do not plan to settle the case with the U.S. Securities and Exchange Commission. He commented on it on his Twitter:

“BREAKING:  @Ripple's legal team tell  @FoxBusiness they have no plans to settle w  @SEC_Enforcement over lawsuit on XRP, confident they can show  @GaryGensler in pursuing the case is picking winners and losers in the #Crypto business to the detriment of innovation. Story developing”

The Ripple community is hopeful that the new head of the SEC, Gary Gensler, will drop the lawsuit, given his past lectures on cryptocurrencies at the Massachusetts Institute of Technology (MIT). It is conjectured that the conflict that escalated to a lawsuit was initiated by former SEC Chairman Jay Clayton.

A new procedural episode

The U.S. District Judge ruled that the SEC would be required to bring enforcement actions against each XRP holder should they be allowed to participate in the case as defendants. On Monday, October 4, U.S. District Judge Analisa Torres ruled that individuals who hold the company's XRP token cannot act in Ripple's ongoing lawsuit as defendants. The determination comes after several XRP token holders purported to file "friend of the court" briefs that would allow them to join the case as defendants and support Ripple in its claims that the token does not violate securities laws.

Judge Torres asserted that allowing XRP holders to join the lawsuit would "force the SEC to take enforcement action against them," according to Law360. She added that it would also delay the case, which Ripple and the token holders have urged for a quick resolution.

However, the judge ruled that token holders may participate as "amicus curiae," i.e., a party not involved in the litigation but is permitted by the court to advise or provide information. Torres stated, "The court concludes that amici status strikes an appropriate balance between allowing the plaintiffs to assert their interest in this case and allowing the parties to maintain control of the litigation."

Ripple's lawyer, Andrew Ceresney, said they were pleased with the outcome for XRP holders who can now "share their significant prospects with the court." In a motion to intervene filed in March, XRP holders argued that they stood to lose billions if the regulator won the case. It also questioned the SEC's purported motives to protect investors. "Claiming to protect investors, the SEC is seeking USD 1.3 billion in alleged ill-gotten gains from the named defendants, but by alleging that actual XRP may constitute unregistered securities, the SEC caused more than USD 15 billion in losses for XRP holders," the filing said.