The "Securities War" between Ripple and the SEC is about to come to an end. Who has a better chance of winning?

Recently, BitBoy Crypto founder and cryptocurrency influencer Ben Armstrong (BitBoy) said that the Ripple-SEC case will be closed in June or July, and the two-year-long lawsuit between Ripple and the SEC has finally come to an end. This battle of the century is bound to affect the direction of US crypto regulation, or change the pattern of the crypto market.

Last week, the price of XRP, which was deeply affected by the Ripple-SEC case, rose all the way and was about to break through the support level. But this week, the price of XRP fell below everyone's expectations. As of April 21, the price of XRP has fallen to its lowest level since March. As we all know, the pending Ripple-SEC lawsuit is an important factor affecting the trend of XRP. The closer the case is to the end, the more unstable the market sentiment is, and everyone has begun to pay attention to the direction and outcome of this long-term tug-of-war.

Ripple-SEC 3-year lawsuit finally comes to an end

This incident dates back to December 2020, when the SEC sued Ripple for violating federal securities laws. The SEC believes that Ripple and its founders sold XRP to investors and made profits from it, which is already a securities transaction, but Ripple did not register XRP as a security. According to the requirements of the federal securities law, the issuance and sale of all securities, including securities involving digital assets, must be registered in accordance with its provisions or be exempted from registration.

As early as 2019, the SEC published the Framework Analysis of Digital Asset "Investment Contracts" based on the Howey test to determine whether digital assets are securities. The SEC believes 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 will not form expectations of profits, then the digital currency is not a security. Based on this, the Blockchain Research Center of the Institute of Financial Technology of Tsinghua University believes that the participants and maintainers of Bitcoin and Ethereum are obviously sufficiently dispersed, so these two digital assets have not been identified as securities by the SEC.

This analytical framework is not a regulatory law, but merely provides certain regulatory expectations for crypto companies, suggesting the possibility of them being regulated as "securities". Obviously, under this framework, a centralized currency like XRP can easily be regarded as a security. However, in response to this accusation, Ripple insists that cross-border payment coins are not securities.

Since then, the two sides have started a nearly three-year-long litigation tug-of-war, with the focus of the dispute still on whether XRP is a security. As of March this year, both parties were still defending their respective positions.

SEC Chairman Gensler believes that the SEC can decide which digital assets are securities, and there is no need to decide through legislation. He also said that the current securities laws cover most of the activities that occur in the crypto market. Although Congress can take action to further clarify, he does not think it is necessary to increase power. But Ripple CEO Brad Garlinghouse believes that such a decision should be based on legislation, not the personal opinion of the SEC chairman.

In a recent tweet on April 8, SEC Chairman Gensler said 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.

Both sides have their own positions. Recently, this long-running battle is finally coming to a conclusion. Some professionals said that the US SEC's lawsuit against Ripple will have a final ruling in the first half of the year.

Why does the Ripple-SEC "securities dispute" last so long?

The debate between the two sides, which has lasted for many years, revolves around the topic of "whether the issuance of XRP is for the purpose of sale."

On a larger scale, the dispute between the two sides is more about "who can decide whether a digital asset is a security". For crypto companies and exchanges, it is a dispute of interests; for US regulators, it is a game of regulatory power. This dispute will set the tone for future US regulatory rules and will also affect the future direction of the crypto market. Therefore, the victory of one party is bound to compress the rights of the other party, and the two sides are deadlocked.

On April 20, John Hyatt, a senior wealth reporter at Forbes, released an investigative report on Ripple’s business practices. Specifically, the report revealed that Ripple sold billions of dollars of XRP through its main Malaysian partner Tranglo, and explained how Ripple whitewashed the numbers to market its core business.

As we all know, cross-border payment is Ripple's core business, and it is divided into two business lines. One has XRP, and the other does not, but only one line really makes money, that is, the XRP business. John Hyatt believes that Ripple has achieved rapid growth by marketing XRP's liquidity payment technology (ODL). In this regard, Ripple's chief technology officer expressed his opinion on Twitter that what Ripple did was just to make XRP as widespread as possible, not to sell it for money. And Ripple can make money from it and maintain its operation just because it is lucky enough. Therefore, it is difficult to characterize "whether XRP is for sale" in this type of business.

Ripple CTO tweeted a reply

The reason why Gensler is so tough is not only to fight for the right to regulate cryptocurrencies, but also to express dissatisfaction with the endless and dazzling operating models of cryptocurrencies. Because under the dazzling, it is easier to breed gray areas. According to foreign media reports, Gensler, chairman of the U.S. Securities and Exchange Commission, recently testified in Congress. He criticized the compliance of cryptocurrencies and expressed concerns about the regulation of stablecoins. He said that I have been working in finance for 40 years and have never seen an area that is so inconsistent with securities laws. He also confirmed that if cryptocurrency tokens are regarded as securities, any exchange that trades such tokens needs to register as a national securities exchange and be regulated by the SEC. Gensler's attitude towards regulation is extremely tough. He insists on maintaining existing regulatory guidelines and not making major changes.

At the same time, he also believes that the digital asset market needs to be more compliant because it seriously endangers investors and undermines the public's trust in the capital market, which will threaten investors' life savings. Ripple believes that once XRP is identified as a security, it will need to be strictly regulated, which will stifle encryption innovation to some extent. The two sides argued and remained deadlocked.

The entire Ripple-SEC lawsuit is a microcosm of the current US crypto market. A new market still has many gray areas in legislation and regulation. The scope and responsibilities of regulation are unclear, and crypto companies' expectations of regulation will also be unstable. The crypto market still needs a clearer regulatory system to reduce possible market chaos, and the result of this lawsuit will become an opportunity for changes in crypto regulation.

Which side has a better chance of winning?

But which direction will crypto regulation change? It still depends on the outcome of the judgment.

Since the volatility of the crypto market is very subtle, the price of XRP can also be seen as a reflection of investors' emotions about the lawsuit. After reports that Ripple may win the lawsuit against the SEC, the XRP token rose by more than 20% in the following 24 hours. The price of XRP soared some time ago. Ben Armstrong believes that it was because some famous Youtubers and influential people expressed their support for the upcoming end of the Ripple-SEC lawsuit, which pushed up the price of XRP because it seemed that Ripple was very likely to win the lawsuit.

However, a lawyer involved in the lawsuit believes that the SEC and Ripple's lawsuit may end in a draw. Because the US SEC's own experts admit 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, the SEC believes that Ripple Labs' high proportion of XRP means that XRP is centralized and a security. These two statements and positions contradict each other.

The verdict of the lawsuit is expected to be announced in a few weeks. But overall, the XRP community remains optimistic about the current situation. They believe that the regulators have different positions and the judge is unlikely to support the SEC. But in any case, all parties will actively fight for their own interest groups. Only when the final ruling is made can this three-year drama come to a real end.