A look at the years of disputes between Ripple and the SEC

Last night, U.S. federal judge Analisa Torres ruled that Ripple Labs Inc. did not violate federal securities laws by selling XRP tokens on public exchanges and through algorithms. As soon as the news came out, XRP rose dramatically, and even the entire crypto market rose. However, Ripple did not win the final victory because the judge also ruled in favor of the U.S. Securities and Exchange Commission (SEC). Analisa Torres believes that Ripple's direct sale of $728.9 million XRP to institutional investors is equivalent to unregistered securities sales and violates federal securities laws. The SEC also expressed its opinion: it is satisfied with some of the rulings, but is still weighing the court's final decision. The Ripple lawsuit has been pending for several years and Golden Finance has sorted out the Ripple lawsuit and takes you back to the twists and turns of the Ripple lawsuit over the years.

The wind started six years ago

The Ripple lawsuit dates back to 2018. On May 3, 2018, Taylor-Copeland accepted the litigation agent request from the litigant Ryan Coffey, who will seek damages on behalf of all investors who bought and sold XRP. Coffey believes that if an instrument involves investing money and has a reasonable expectation of profit, it is a security, and the characteristics of XRP meet this statement. Tom Channick, head of corporate communications at Ripple, responded: Whether XRP is a security will be decided by the U.S. Securities and Exchange Commission, but we still insist that XRP should not be classified as a security.

Since then, there have been continuous lawsuits: On June 5, 2018, investor Vladi Zakinov filed a class action lawsuit in the California Superior Court. Zakinov claimed that XRP is actually a security under California law; On June 27, 2018, California resident David O'connor filed a lawsuit against Ripple Labs and XRP II in the California Supreme Court. He believed that the XRP offered for sale by Ripple had the signs of traditional securities, but they were not registered; On July 3, 2018, Israeli resident Avner Greenwald filed a lawsuit against Ripple Labs and its subsidiary XRP II LLP in the California Superior Court. Greenwald claimed that it created 100 billion crypto tokens out of thin air and sold them to investors without registration.

As a result, whether XRP is a security has become controversial. Section 5 of the U.S. Securities Act provides that no person may issue securities without registration. The Securities Act itself has a broad definition of "securities," including "investment contracts." The U.S. Supreme Court used a 1946 ruling to determine whether a specific transaction constitutes a securities offering, the Howey Test, which defined the criteria for determining an investment contract as: investing money, generating benefits from investment, investing in a specific business, and obtaining investment returns through the efforts of the issuer or a third party.

In 2019, the SEC released a Framework Analysis of Digital Asset "Investment Contracts" based on the Howey Test. The analysis states that if the development of a digital currency depends on the efforts of a company and investors expect to make reasonable profits from their investments, then the digital currency will be considered a security. On the contrary, if a digital currency is sufficiently independent and decentralized, no participant can influence the operation of the digital currency, and investors do not form expectations of profits, then the digital currency is not a security. Under such a regulatory framework, Ripple is considered to be a security.

The tug-of-war between Ripple and the SEC officially began in 2020

On December 22, 2020, the U.S. Securities and Exchange Commission (SEC) announced that it had filed a lawsuit against Ripple and its two executives, including CEO Brad Garlinghouse and co-founder Christian Larsen, alleging that they raised more than $1.3 billion through an unregistered, ongoing digital asset securities offering. The indictment alleges that the defendants did not register their offers and sales of XRP, nor did they obtain any registration exemptions, in violation of the registration provisions of the federal securities laws. Stephanie Avakian, director of the SEC's enforcement division, said that Ripple, Larsen, and Garlinghouse did not register their ongoing offers and sales of billions of XRP to retail investors, which prevented potential buyers from fully understanding XRP and Ripple's business, and ultimately only benefited the two of them. The SEC also pointed out that the "first pre-trial meeting" will be held by telephone on February 22, 2021. Affected by the negative news, the price of XRP plummeted by 20%, and many exchanges also removed XRP.

On February 15, 2021, in a letter jointly submitted to Analisa Torres, a federal judge in the United States District Court for the Southern District of New York, the SEC, Ripple, and the two founders all stated that there was little possibility of "a settlement before the pre-trial conference regarding Ripple's alleged securities violations."

In May 2021, Ripple initially won a victory in the tug-of-war: Sarah Netburn, a judge at the U.S. District Court for the Southern District of New York, rejected the motion filed by the SEC and did not allow the SEC to obtain a memorandum of "discussions between Ripple and its lawyers regarding the sale of XRP."

In June of the same year, the US SEC requested that the discovery period of the Ripple case be extended by 60 days, a request that was approved by District Judge Sarah Netburn, but Ripple strongly opposed the request, claiming that delaying the proceedings would pose a "survival threat" to its business in the United States. In the same month, Ripple filed a motion requesting the court to approve the testimony of former SEC financial director William Hinman, but was resisted by the SEC and requested the revocation of Ripple's testimony against Hinman. The reason is that Hinman once stated that Bitcoin and Ethereum are not securities, which many people believe is the position of the SEC. But the SEC said that this was just his personal opinion and Hinman never mentioned XRP.

In September 2021, the SEC asked Ripple to provide internal recordings, including various all-staff meetings, SBI town halls, fireside chats, etc. starting from the fourth quarter of 2014. However, there is controversy over whether Ripple should provide some recordings.

In October 2021, Ripple required the SEC to answer self-admission requests because they were related to the defendant's "fair notice" defense. It is reported that a self-admission request is a discovery tool used to make the other party swear to admit certain facts. The SEC is seeking a protective order allowing it not to respond to the defendant's RFA.

In November 2021, U.S. District Judge Sarah Netburn sided with the SEC and ordered Ripple to hand over audio and video recordings of its internal meetings.

In December 2021, the US non-profit organization EMPOWR (Empower Oversight Whistleblower & Research) sued the SEC over the Ripple case, making the lawsuit even more muddy. This is because EMPOWR believes that former SEC Chairman Jay Clayton and Director Bill Hinman have a conflict of interest. Under this influence, the SEC favors ETH and BTC and opposes XRP.

Since then, although there have been new developments between Ripple and the SEC, progress has been slow. In August 2022, the SEC filed a request to submit a 90-page response to exclude the testimony of Ripple's ten expert witnesses. In October of the same year, the SEC pointed out in a document submitted to the court that Ripple Labs' motion for summary judgment should be dismissed because there was indisputable evidence that the defendant was involved in unregistered securities offers and sales to public investors. Ripple had previously filed a document opposing the SEC's motion for summary judgment, saying that it had no viable legal theory to support its claim that Ripple must register XRP as a security under the Securities Act of 1933.

In April 2023, SEC Chairman Gensler stated that there is nothing incompatible between the crypto market and securities laws. The SEC's goal is to bring the crypto space into compliance with securities laws and ensure that investors in digital assets receive the same protection as other markets. However, Ripple's policy director Susan Friedman believes that cryptocurrencies are different from securities, and this difference requires specific rules rather than a one-size-fits-all approach to regulation.

On June 13, the Hinman documents were unsealed after a lengthy back-and-forth between Ripple and the U.S. Securities and Exchange Commission (SEC). Garlinghouse said the unsealing of the Hinman documents showed that the SEC intentionally created confusion about the rules, and they took advantage of that confusion through enforcement.

In the same month, Ripple Labs Inc filed six documents with the court, one of which was a key document strongly opposing the U.S. Securities and Exchange Commission (SEC)'s request for summary judgment. In this 89-page document, Ripple shared its insights into many inconsistencies in the SEC's arguments and hoped to obtain summary judgment against the SEC.

On July 13, Ripple won the ruling that XRP is not a security. XRP rose more than 17% in a short period of time. The judge's ruling stated: "After considering the economic reality and the overall situation of institutional sales, the court concluded that Ripple's XRP institutional sales constituted investment contracts and sales of unregistered securities, in violation of Section 5 of the Securities Act." "Taking into account the economic reality and the overall situation, the court concluded that Ripple's programmatic sales of XRP, other distributions, and sales by Larsen and Garlinghouse do not constitute investment contracts and sales." According to the court ruling documents, the SEC v. Ripple case will enter the trial stage.

From the above timeline, we can see that Ripple's victory in the lawsuit was very bumpy. Ripple CEO Brad Garlinghouse revealed in May this year that Ripple has spent $200 million to defend the lawsuit filed against it by the U.S. Securities and Exchange Commission (SEC).

Who predicts the outcome of a lawsuit?

Since the Ripple lawsuit has a long history, many people in the industry have predicted who will win the lawsuit.

Lawyer Bill Morgan, who was involved in the lawsuit, believes that the lawsuit will end in a draw in the future. He emphasized that the SEC's own experts admitted that the prices of the two major crypto assets Bitcoin and Ethereum can explain up to 90% of XRP price changes since mid-2018. At the same time, Ripple Labs' high proportion of XRP means that XRP Ledger (XRPL) is centralized, and the argument that XRP is a security still exists.

Some industry insiders believe that the SEC will win. Gene Hoffman, COO of Chia Network, has predicted that the SEC will win the legal battle with Ripple and a federal judge will rule that XRP is a security. Miles Jennings, general counsel and head of decentralization at Andreessen Horowitz (a16z), said that Ripple will not be able to win the SEC lawsuit based on the fact that Ripple itself sells XRP to retail investors. Max Keiser, a well-known Bitcoin supporter, has pointed out that Ripple will lose the lawsuit against the SEC. U.S. Congressman Brad Sherman has said that the SEC will win the lawsuit against Ripple because XRP is a security. He has been in contact with SEC Chairman Gary Gensler and SEC Enforcement Director Gurbir Grewal to expand the scope of the Ripple lawsuit to include exchanges that facilitate XRP transactions.

There are also many voices that believe that Ripple will win in the end. Ripple lawyer John Deaton believes that Ripple will win. Deaton said that the US SEC's claim that XRP is a security at any time proves that the Howey test has no simple definition, which makes it a difficult task to use to determine whether an asset is a security. Senior analyst Roslyn Layton once hinted that the US SEC may "fail miserably" in the lawsuit against Ripple. By then, the court's ruling on the regulator may severely limit its ability to regulate the crypto asset industry. This will be a big victory for the US crypto industry and innovation. Crypto legal expert Jeremy Hogan once said that the SEC may have been prepared for the failure of the lawsuit against Ripple Labs. Former US SEC official Joseph Hall believes that the SEC is not yet capable of handling lawsuits involving cases involving cryptocurrencies as securities, so it is difficult to win the case against Ripple. Hall believes that Ripple has a strong defense that the SEC failed to give fair notice of its investigation.

The impact of the Ripple lawsuit on the industry

Previously, former U.S. federal prosecutor Filan pointed out that the lawsuit between Ripple and the SEC will end before the first quarter of 2023, but the year is already halfway through and the Ripple lawsuit is still awaiting follow-up. An expert group once predicted the average price of Ripple, believing that if Ripple wins the lawsuit, the price of the currency may increase by 4 times, reaching $3.61 by 2025 and $4.98 by 2030.

David Gokhshtein, founder of Gokhshtein Media and former U.S. congressional candidate, believes that if Ripple defeats the SEC in court, it will have important implications for the entire crypto industry: not only will XRP take off, but every legitimate crypto platform will take off as well. He also believes that the result of Ripple's victory will also make crypto regulation clearer. Broker Bernstein pointed out: The U.S. District Court ruled that Ripple's XRP token should not be considered a security if it is sold through an exchange or programmatic sales, which is a landmark ruling in the cryptocurrency field. This weakens the SEC's position. Luke Martin, founder of cryptocurrency investment company Venture Coinist, pointed out that the core content of the U.S. SEC's lawsuit against Binance and Coinbase is that they provide sales of unregistered securities on their platforms. After the XRP case, Martin believes that this will deal a substantial blow to the SEC and its chairman Gary Gensler. He believes that this decision is "unimaginably good" for the industry. John Deaton, a lawyer who supports XRP, expressed a similar view. He believes that Coinbase is another winner and related coins will benefit from it. Similarly, Tyler Winklevoss, CEO of cryptocurrency exchange Gemini, also said that the ruling destroyed the SEC's charges against Coinbase. His twin brother Cameron Winklevoss said that the ruling was a watershed that would make it difficult for the SEC to exercise its authority over cryptocurrencies.

In addition, John Deaton, founder of CryptoLaw.US, has been closely following the lawsuit between the SEC and Ripple. He once pointed out that the emergence of a large number of XRP wallets was due to the SEC's attack on Ripple, which brought good advertising effects to Ripple.

In summary, although the Ripple lawsuit has gone through a difficult road of disputes, it has temporarily achieved a phased victory. This victory will play an important role in boosting the crypto market in the short term and benefiting the development of the industry in the long term. According to CoinMarketCap data, the market value of XRP has exceeded 42 billion US dollars, and its market value has risen to the fourth place in the cryptocurrency market value ranking, second only to BTC, ETH, and USDT. In the early morning of today, Golden Finance reported that XRP broke through 0.8USDT, with a 24-hour increase of more than 70%.