The Securities and Exchange Commission charges Ripple with conducting an unregistered securities offering. Ripple plans to fight the charges.
As the final days of the legal conflict surrounding the crypto sector wind down, all that is left is for Judge Analisa Torres of the Southern District of New York to issue her verdict. Stakeholders in the outcome, which will reverberate throughout the crypto sector, have been attempting to divine when a judgment might land, based on the judge’s past ruling patterns. Some believe a resolution is only days away.
In bringing the charges, the SEC has staked a claim to jurisdiction over cryptocurrency. At the center of the suit is the question over whether XRP, the crypto token on which Ripple’s services are based, should be classified as a security—a tradable financial instrument like a bond or derivative—or something else entirely. If the court rules that XRP is a security, it would follow that almost all other crypto tokens are too, making them subject to the SEC’s supervision. This could have a chilling effect on the crypto industry, which has been booming in recent years.
John Deaton, defense lawyer and expert witness on the case, believes that if the US government classifies XRP as a security, it would be “very bad news” for crypto businesses. Without any legislation that clearly defines crypto assets, the question of whether they should be treated as securities is assessed on a case-by-case basis through the application of the Howey test. Under this test, an investment contract (in this context, a security) is defined as “an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.”
The SEC charged Ripple and its executives with violating federal securities law, declaring that XRP met the criteria of a security. Ripple is not the issuer of XRP, but some of its executives were involved in developing the token. Ripple had also received a donation of 80 billion XRP in the early 2010s (worth around $30 billion at present) to develop use cases—something the SEC took issue with.