Ripple, Industry Wait to See if XRP Case Will Be a Small Splash or a Tsunami
A pivotal court decision could be coming soon as to whether a major cryptocurrency is a security, following years of back-and-forth between the Securities and Exchange Commission (SEC) and Ripple Labs – the creators of the XRP cryptocurrency. Ripple and the SEC asked for a ruling from a judge in September, and a decision is expected during the first part of this year.
At the heart of this ongoing dispute is whether the sale of Ripple’s XRP token constitutes an unregistered security, which the SEC has accused Ripple of doing. The SEC claims that Ripple raised $1.3 billion in 2020 through the sale of XRP and has also sued Ripple’s CEO Brad Garlinghouse and co-founder Christian Larsen.
The decision is expected to have significant consequences for the value of XRP, the sixth-largest cryptocurrency by market capitalization, with a total market value of over $28 billion as of Wednesday afternoon. Additionally, a decision on this case is expected to set an important legal precedent for the broader digital asset industry.
However, experts feel that the potential impact of the decision could be highly specific to the facts of SEC v. Ripple, limiting any broader impact. Ashley Ebersole, General Counsel at 0x Labs and former SEC lawyer, said, “The court could release an opinion that reaches more legal issues and has a more dramatic effect.” On the other hand, Ty Gellasch – a one-time counsel to former SEC Commissioner Kara Stein and now the president and CEO of the Healthy Markets Association – stated that the actual impact of a verdict is near zero, not affecting the broader regulation other than the fate of Ripple itself and its executives.
If the court decides that XRP is a security, that would make Ripple’s unregistered securities offering unlawful. The court could also address secondary market transactions, as XRP was issued on exchanges. Past initial coin offering (ICO) cases have not seen repercussions for secondary market sales. Gary DeWaal, Senior Counsel at law firm Katten, notes that the decision regarding whether XRP is an investment contract in connection with the initial offering will be a very specific facts and circumstances decision. “My guess is that it will be a victory of public opinion for the SEC, but it will probably not move the bar tremendously from where it is today,” said DeWaal.
The SEC has been undefeated when it comes to digital assets and what they think are securities. If the judge does decide that XRP is a security, this could set a precedent affecting future rulings over other tokens. Aaron Kaplan, co-CEO and co-founder of Prometheum, a digital asset infrastructure firm, claims that virtual currency exchanges could be much more concerned and aware of the potential regulatory implications of certain assets they’re trading. But the larger intellectual paradigm shift is already occurring.
On the other hand, Ripple has made a fair notice argument in court, claiming that the SEC did not give enough advance warning that selling XRP was not allowed, essentially echoing broader criticism from the industry over the lack of specific digital asset guidance from the agency. If Ripple wins on its arguments, it could lead to a “powerful defense,” according to Agnes Gambill West, a visiting senior research fellow at the Mercatus Center. Other crypto companies could use that against the SEC in the future.
So, what will happen? Either side could appeal the court’s decision, prolonging the fight. The court may also choose not to issue a full summary judgment. “There are three options here – one side wins, other side wins, nobody wins, and the fight goes on,” says Gellasch.
Regardless of the outcome, the industry is poised for a challenging year, particularly as new regulations arise impacting how cryptocurrencies and digital assets are regulated. However, the hope is that a decision in this case will help bring clarity and certainty to the sector, giving businesses and investors more confidence to continue building the infrastructure that will be necessary over the next few decades.
Overall, this Ripple case is incredibly important, not just for Ripple but for the entire cryptocurrency industry. Any decision made by the judge could set a precedent for future cryptocurrency cases, and could shape the regulatory landscape for years to come, which is why both Ripple and the SEC are waiting with bated breaths for the judge’s decision. Whether it will be a small splash or a tsunami remains to be seen.
