Gu Yanxi: A brief analysis of the causes and impacts of the SEC's lawsuit against Ripple

The SEC has just started its case against Ripple. The SEC believes that XRP is an unregistered security that has been illegally sold since 2013. Therefore, it is suing Ripple, its CEO Brad Garlinghouse and co-founder Chris Larsen.

The SEC has clearly been planning to regulate the cryptocurrency market

The SEC's lawsuit against Ripple was expected. The vast majority of cryptocurrencies in the market are designed to be very similar to securities. In order to regulate this market, the SEC has been constantly emphasizing the definition of securities, which is commonly known as the Howey Test. If a cryptocurrency or token meets the Howey Test, then it should be considered a security product. Its operation also needs to be operated in accordance with securities regulations. On the one hand, the SEC has been constantly emphasizing its basic position in this regard, and on the other hand, it has been constantly taking regulatory measures to sue projects in the market that it believes are illegal. The most famous cases are the lawsuit it filed against Telegram in October 2019 and ultimately won, the out-of-court settlement reached with EOS in September 2019, and the recent lawsuit against Kik. In addition to these more influential cryptocurrencies, the SEC has also been constantly suing other smaller-scale illegal projects in the market, such as the recent penalty against ShipCoin. Due to the SEC's position in this regard and the measures it has continuously taken, the number of tokens generated in an illegal manner in the US market has been greatly reduced. But this has not been eradicated, and non-compliant projects continue to appear in the market. But now it seems that the SEC is taking a systematic approach to address non-compliant projects in the market.

If we rank cryptocurrencies by market value, the SEC has stated that Bitcoin and Ethereum, which rank first and second, are not securities products. And this attitude shows that the chronological order is Bitcoin first and Ethereum later. Now the SEC has begun to sue Ripple, which ranks third in market value. It seems that the SEC is solving the influential cryptocurrencies in the market one by one.

The measures taken by the SEC are actually to eliminate regulatory uncertainty. This will help crypto digital finance develop within a more standardized scope. Because the attributes of crypto digital currencies such as Ripple have not been clearly stated by regulators, various innovations in this area in the market have the risk of violating regulations. Now that the SEC has made clear its position on Ripple, it will help the market to be more clear about the regulatory attitude, and the uncertainty in this area in the market will therefore be reduced.

The market needs clearer and more helpful securities regulations

Ripple has both securities and instrumental attributes. For the SEC, since Ripple has securities attributes, it falls within the SEC's regulatory domain. Therefore, it is legal for the SEC to take regulatory measures against Ripple. However, Ripple does have instrumental attributes. And this instrumental attribute is also used in the market (although not as widely promoted by Ripple itself). Therefore, Ripple is not just a traditional securities product. Due to the development of innovations based on blockchain technology, such tokens with multiple attributes or different attributes at different times will continue to appear. How relevant laws and regulations regulate such tokens is a huge challenge. Obviously, the market has already taken the lead in this regard. Relevant regulations have not yet been changed accordingly. The SEC's lawsuit against Ripple may promote the revision of US securities laws in this regard.

Impact on Bitcoin and Ethereum

The result of the SEC's lawsuit against Ripple is still uncertain. It is possible that it will completely ban its issuance like Telegram, or it is possible that some kind of out-of-court settlement will be reached like with EOS. Of course, there is also a chance that the SEC will lose the case, although this chance is very small. But in general, Ripple may not be circulated and traded as it is now, which means that the amount of trading funds in the market that flow into Ripple will decrease. Part of this trading volume will flow into Bitcoin and Ethereum. In addition, since the SEC will definitely gradually deal with the more influential encrypted digital currencies in the market, some of them will definitely withdraw from the market and no longer circulate. Therefore, the market concentration of encrypted digital currencies will be further improved. More funds will flow into Bitcoin and Ethereum. The prices of Bitcoin and Ethereum will therefore increase.

Judging from the development trend of encrypted digital assets, more new digital assets will be generated in a centralized manner. For example, security tokens are of this type. The probability of tokens generated in a distributed manner like Bitcoin and Ethereum is relatively small. Therefore, Bitcoin and Ethereum are the most representative digital assets among assets generated in a distributed manner. Their uniqueness will be more prominent, and their value will therefore increase.