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Anyone following the Ripple vs. SEC lawsuit knows this litigation has been playing out for what seems to be an eternity. The U.S. Securities and Exchange Commission (SEC) lawsuit is quickly becoming something of a mother of all lawsuits for the SEC's jurisdiction. The U.S. regulatory agency is fighting tooth and nail because a loss could strip the SEC of future regulating power in the cryptocurrency space and set a precedent for future cases.
More than two years have passed since the American stock exchange regulator initiated litigation accusing Ripple of selling securities without having proper approvals.
The lawsuit dropped by the SEC on Ripple has alleged for two years that Ripple and its executives, Brad Garlinghouse and Christian Larsen, offered XRP in the form of unregistered securities.
Despite the SEC's size and intimidating scope of power, things appear to be pivoting in the crypto company’s favor. The SEC seems to be trying to buy time and perhaps hope for a surprise that could score a point in its favor.
Key Players in the SEC Lawsuit
- Brad Garlinghouse - CEO of fintech company Ripple Labs
- Chris Larsen - Co-founder of Ripple Labs
- John Deaton - Managing partner of the Deaton Law Firm, which represents 70,000 XRP investors
- Hester Peirce - Ex-commissioner for the SEC dubbed by many as the "Crypto Mom"
- Judge Analisa Torres - U.S. District Court Judge for the Southern District of New York
- Bill Hinman - Former director of the SEC’s Division of Corporation Finance
- Jay Clayton - Ex-chairman of the SEC from May 4, 2017, until December 23, 2020
History of the Ripple Lawsuit
The action against Ripple Labs was filed in December 2020 — notably the last day of SEC Chairman Jay Clayton's day in office. The suit alleges Ripple and executives Brad Garlinghouse and Chris Larsen raised $1.3 billion of unregistered securities through its offering of the digital currency XRP.
Shortly after the SEC accused Ripple of conducting an unregistered securities offering in the United States, the price of XRP plummeted.
Coupled with a crash in price things became even worse when cryptocurrency exchanges in the United States began delisting XRP from their exchanges because of fear of being investigated by the SEC for facilitating the trading of XRP.
The massive decline in the XRP price angered thousands of investors and sparked the interest of attorney John Deaton, who now represents over 70,000 XRP investors accusing the SEC of wreaking havoc on investors.
As mentioned earlier, the case itself centers largely around whether XRP constitutes a security under federal securities laws. Many critics of the SEC argue the current securities laws are outdated and the Howey Test framework from 1946 is not an adequate framework for digital assets.
The Howey Test is a Supreme Court ruling surrounding the sale of a farmer's orange groves. The decision provided a framework that is used to determine if an asset is to be deemed a security or not.
Although the center of the SEC against Ripple case is around securities laws, the past years have been predominantly over discovery and privilege matters.
One of the most important landmarks of the case was on March 11, 2022, when Judge Analisa Torres of the Southern District of New York issued two substantive rulings: (1) one denying the SEC’s motion to strike the defendants’ “fair notice” defense and (2) the other denying the individual defendants’ motions to dismiss.
The denial of the SEC's motion to strike Ripple's fair notice defense provided Ripple with a solid defense to build upon. On the other hand, the denial of Ripple's motion to dismiss the case meant this showdown was far from over.
Ripple's Fair Notice Defense
Ripple's legal team decided early on to focus on taking fair notice as its defense in the case. The company took the stance that it lacked “fair notice that its conduct was a violation of law, in violation of Ripple’s due process rights.” Ripple claims in the lawsuit that the SEC failed to provide clarity on whether to label XRP as a security or not.
Besides the fair notice defense, Ripple also believes the SEC has unfairly engaged in "regulation by enforcement" by targeting Ripple for the unregistered sales of XRP.
The William Hinman Speech
In 2018, the director of the SEC's Corporate Finance Division William Hinman gave a speech about digital assets that outlined the same issue behind the lawsuit.
Ripple has continuously fought to admit this speech as evidence, but the U.S. regulator has done everything in its power to stall this speech from seeing the light of a courtroom.
The speech Hinman gave stated that a cryptocurrency that could have been a security when it was first sold could lose this status as it became sufficiently decentralized.
After the 2018 speech, no further guidance from Hinman or the SEC was given, so many investors including Ripple took the speech as a framework of sorts.
An argument Ripple makes is that it controls less than 4% of the validators on the XRP ledger. It argues that the company was once overruled by the majority of validators even though it opposed a change being made to the ledger, making it “sufficiently decentralized.”
The Hinman speech could end the lawsuit for Ripple and allow its business in the U.S. to move forward; however, the SEC seems to assert the opposite.
Could the SEC be backed into a corner, or does it believe this speech is irrelevant?
Regulatory Inconsistencies and Conflicts of Interest
Throughout the Ripple litigation, many anomalies and potential conflicts of interest have come out of the woodwork in the crypto industry.
Crypto investors are notorious for their tendency to be tribal, but many red flags arose since the Hinman speech between Ethereum and the officials surrounding it.
Here is a list of odd coincidences that could have led to unfair treatment for Ripple and an unfair advantage for Ethereum.
- Before joining the SEC, Bill Hinman worked for the Simpson Thacher & Bartlett Law Firm. The firm itself is a member of the Enterprise Ethereum Alliance, which was created to market Ethereum as an enterprise solution. Among these prominent members is the Simpson Thacher & Bartlett Law Firm (Hinman).
- Jay Clayton is the ex-commissioner of the SEC who dropped this case the day after leaving office. Shortly after leaving the SEC, Clayton was hired by One River Digital Asset Management. One River is a renowned crypto hedge that made big bets on Bitcoin and Ethereum beginning shortly before the Ripple lawsuit.
- A month after the Ripple lawsuit, SEC Enforcement Director Marc Berger left the regulatory agency to join Simpson Thacher & Bartlett.
- During Bill Hinman's time at the SEC (2017 to 2020), Hinman made $15 million in payments from Simpson, Thacher & Bartlett.
- After Hinman left the SEC, he returned to Simpson Thacher & Bartlett. The ex-regulator was also made a senior advisor at the $2 billion crypto fund Andreessen Horowitz.
Could Ripple Succeed?
As of August 2022, 70,000 XRP holders have joined attorney John Deaton’s class action against the SEC.
In a tweet, Deaton wrote in August, he describes the fact he represents XRP holders from every U.S. state and does not take kindly to the SEC's recent actions.
“70,100 as of now. Gary Gensler & @SECEnfDirector, over 70K XRP Holders from diverse backgrounds from all 50 states, every U.S. territory, and 141 countries around the [world] have joined together to fight [vs] your unlawful expansion of Howey. You will lose the war,” attorney Deaton tweeted.
Since the Ripple lawsuit dropped, the SEC is facing not one but two opponents that refuse to throw in the towel.
At the moment, developments indicate Ripple is on the winning side of the SEC lawsuit because it has won several important motions that could be essential to its fair notice defense.
If Ripple manages to prevail in court, then the case's precedent could serve to be crucial to the future regulatory clarity of all digital assets.
How to Buy Ripple
Do you think that Ripple has a good chance at winning the SEC lawsuit? If so you may want to start investing in Ripple. If it does win, XRP will likely skyrocket in price. This isn't a guarantee, however, especially if the market already expects it to win.
It is extremely easy to start trading Ripple because it is offered on a few of the best cryptocurrency exchanges including Uphold. Uphold supports more than 200 cryptocurrencies including XRP. Investing in Ripple with Uphold is easy. It supports Apple Pay, credit card and debit card purchases as well as traditional bank account transfers.
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