How The Ripple v. SEC Lawsuit Could Affect The Entire Crypto Industry: A Lawyer’s Take

With the U.S. Securities and Exchange Commission (SEC) launching a full offensive against crypto this year, an ongoing lawsuit against one of the agency’s first industry targets – Ripple – remains as prevalent as ever.

Given recent developments, many parties close to the case believe the court’s ruling may be imminent. How might the result of the Ripple v. SEC lawsuit affect the crypto market and regulatory landscape as a whole?

Let’s dive in.

Recap: Ripple v. SEC

In December 2020, the SEC charged Ripple and its two top executives – CEO Brad Garlinghouse and former CEO Chris Larsen – with conducting a $1.3 billion unregistered securities offering in the form of XRP, dating back to 2013.

The lawsuit caused the price of XRP to plummet at the time, and incited many crypto exchanges to delist the asset to remain compliant with federal securities laws.

Ripple didn’t back down, however. According to Garlinghouse, the company has spent roughly $200 million defending itself from the SEC’s allegations. The company’s core argument is that XRP itself is not a security or investment contract, but a digital currency used to facilitate cross-border payments.

Garlinghouse expressed confidence last month that the case could be approaching its conclusion within a few weeks – implying its resolution could be announced any day now.

Who is Correct?

Thus far, U.S. Congress hasn’t passed any legislation clarifying how crypto assets ought to be classified under the law – whether as securities or commodities.

The country’s chief market regulators – the SEC and Commodities and Futures Trading Commission (CFTC) – are at odds on the subject, with the former seemingly believing that all cryptos besides Bitcoin are securities.

SEC chairman Gary Gensler keeps a tight lip when asked to publicly discuss which specific cryptocurrencies are securities. Instead, he often refers the industry to the Howey Test – a decades-old legal standard for identifying whether financial assets qualify as investment contracts, and therefore as securities under the Securities Act of 1933.

There are four prongs to passing the Howey Test:

1. An investment of money…
2. In a common enterprise…
3. With the expectation of profit…
4. To be derived from the efforts of others.

Industry leaders like Ripple often contest the SEC’s interpretation of the Howey Test when applied to digital assets. For example, Coinbase argues that stablecoins like the Paxos-issued BUSD (which the SEC alleged is a security this month) are not investments, as their value remains “stable” across time.

What Do Lawyers Think Of XRP?

John Deaton – founder of Crypto Law.US – is a lawyer representing over 75,000 XRP holders in the Ripple v. SEC lawsuit. He is firmly against the SEC’s position, asserting that XRP is not a security, and that Gensler ought to be fired from his position.

So when you take all the law into consideration, the SEC has NOTHING to support its theory that secondary market sales are also securities. Some may argue that the SEC has a right to pursue novel theories, unsupported by the law. I disagree.

— John E Deaton (@JohnEDeaton1) June 19, 2023

Sandy Seth – a patent lawyer of 25 years – also expressed skepticism of the SEC’s case in a Twitter thread on Monday, arguing that XRP does not meet all of the requirements of an investment contract under Howey. Though not a securities lawyer by profession, Seth’s analysis received high praise from Deaton as “good or better than any of mine or anyone else’s.”

Seth spoke with CryptoPotato this week about his case against the SEC, and what implications the lawsuit carries for the entire industry.

“The most basic requirement [of] a security is an instrument that evidences a financial stake in a common enterprise, like the Howey contracts did,” he said. The SEC, by contrast, has “bogusly” tried to eliminate that requirement.

His claims are in line with Deaton’s who has often said Ripple’s success as a company is not necessarily tied to XRP’s gains or losses on the market.

Seth said he hopes that the SEC is not “bamboozled” by the SEC’s Howey interpretation, and finds that none of the contracts under which Ripple sold XRP are securities, since they do not “convey any interest in a common enterprise.”

The Hinman Emails

Another of Ripple’s common arguments is that the crypto industry received faulty and contradictory guidance from the SEC about how digital assets are classified. They cite a 2018 speech from former commissioner William Hinman as an example, in which he describes how cryptos that were once commodities could potentially transition into being securities, among other criteria.

Earlier this month, the SEC was forced to leak internal communications about the speech. The emails revealed that Hinman published the speech despite receiving multiple warnings from his fellow agency members that the speech could confuse readers about which characteristics factored into an asset being a security.

While showing proof of potential SEC corruption, Seth said those emails are likely just a “red herring.”

“The fair notice defense is *NOT* implicated (if the Court rules, as it should, that neither XRP itself nor the Ripple contracts under which it was sold were investment contracts),” he explained.

What Does This Mean For Crypto?

Like many in the crypto industry, Seth believes that a ruling in Ripple’s favor can “clarify in one fell swoop” that the SEC does not have broad authority over the crypto industry.

This would effectively protect crypto companies from the agency’s future enforcement actions until clarifying legislation is passed in Congress. Until then, another agency – like the CFTC – could take charge.

The SEC sued crypto exchanges Binance and Coinbase this month, alleging that over a dozen cryptos listed on their platforms were securities in the process. Many of these coins – including Cardano (ADA) and Solana (SOL) – were sold and behave in a similar manner to XRP, and suffered similar losses to XRP after the SEC’s allegations.

Seth is himself a crypto investor, who spent months reaching his conclusion on the case after reading the SEC’s summary judgment filings.

“Through bogus enforcement action the SEC has terrorized the crypto industry,” he said. “The SEC has hurt crypto investors and what’s more it knew it was hurting the investors when it brought these lawsuits.”

The post How The Ripple v. SEC Lawsuit Could Affect The Entire Crypto Industry: A Lawyer’s Take appeared first on CryptoPotato.