March 2021 Updates of SEC vs. Ripple: Developments in the XRP lawsuit
Ripple Accused SEC of Causing $15,000,000,000 Damages, in early December, the United States Securities and Exchange Commission (SEC) settled its gaze on Ripple for legal inspection. The problem arose when the SEC suspected that Ripple sold its digital currency XRP without legally going through the registration process. XRP, worth $1.38 billion, was sold during 2013-2020. The illegal act was conducted even though SEC stated that lawyers had made Ripple aware of the legal standard procedure. According to SEC, Ripple ‘choosing to ignore’ the issued memos was bound to get it in trouble.
The quarreling over details of the content of those memos continued, according to news reports. On one end, Ripple presented its view on the memo it was issued as Ripple believes they have legitimate reasons to believe that XRP is not a security. Nonetheless, Ripple was charged by the SEC in a vicious lawsuit for selling over $1.3 billion in unregistered securities. The lawsuit in itself resulted in a traumatic loss for Ripple and XRP users in a total sum of $15,000,000,000. The news brought forward devastating reputational crisis reports around the payments, and now XRP is going downhill and affecting its investors negatively.
“Today, Ripple filed our answer to the SEC’s amended complaint. Notably, with full transparency to the SEC: XRP was listed on 200+ exchanges, billions of dollars in XRP were bought/sold monthly, many market makers had daily XRP transactions, and 3rd party products (not developed by Ripple) used XRP. We’re looking forward to learning more about the SEC’s meetings with major XRP market participants who asked for guidance but were never told that XRP txns would be subject to the federal securities laws. Full filing here.”
SEC was accused by Stuart Alderoty, General Counsel at Ripple, for knowing that Ripple’s asset was already amongst the list of several exchanges. Despite SEC alleging that XRP’s sale has been illegal, throughout the past decade, SEC had been kept in the loop about XRP’s status, and yet they never guided them in the past over those major exchanges. Hence, Ripple is fighting back the accusations by putting forward evidence regarding SEC’s failure to disclose that XRP could be prescribed as a security lawfully. Some may be concerned that Ripple is simply trying to save a sinking boat, especially a boat that is drowning in the U.S. market. Nonetheless, this is merely news reports speculating.
Organizations such as MoneyGram (a money transfer business platform) have revoked their access that Ripple had. They have disassociated several investors before they face a serious loss as Ripple did. Fortunately for Ripple, 5% of their customers are from the U.S. market; they will recover soon enough once the lawsuit is settled. The value Ripple touched was around $0.63 in the previous month, but it came tumbling down to $0.2 after the SEC accusation.The CEO of Ripple, Brad Garlinghouse, was confident, as he stated, having acquired 15 new contracts with banking organizations internationally. He claimed that Ripple’s customers were majorly not from the U.S. in the first place, around 95%. He simply looked at the matter as an obstacle only faced in the United States market to slow down innovation. In the Asia Pacific region, the liquidity of Ripple has mainly grown, especially in Japan. The Financial Service Agency declared that they did not view XRP as a security in Japan.
In some ways, it can be looked at as SEC stumbled in the Ripple case and lost itself in a maze they created. When they filed that lawsuit against the blockchain technological giant company Ripple, the event happened at a peculiar time. The cryptocurrency XRP was declared to not simply be a distribution of digital tokens in a payment platform. A commonly observed judgment was how the SEC took seven years to make this accusation against XRP. Billions of XRP’s tokens flowing through secondary markets of cryptocurrency were in the process, and the accusation was made in the midst of it. An incredibly odd noticeable portion was the retirement of Chairman Jay Clayton(now Ex SEC Chairman). With the new administration in line and filings heating cases, one may only conclude the SEC’s judgment being misguided. The developments that followed made it further seem like a disastrous move. Gary Gensler, presumably the incoming chairman, will not deal with the aftermath of Clayton’s mess.
The hurricane was unforeseen by the SEC but well understood on January 1, as XRP holders prepared to fight back with clear intentions to fully expose the scandal for what it is. Rhode Island attorney John E. Deaton struck back and exposed the weakness SEC’s lawsuit had within. He filed a petition in the U.S. District Court in support of the CRP holdings to not be described as a security lawfully. XRP wasn’t bought by him as an investment contract, as it is not a security and all SEC lawsuits resulted in was damage for him and several other investors in the run. The value of the cryptocurrency went spiraling down, and they were removed from lists in crypto exchanges. Many XRP retail holders were willing to backup John E. Deaton when he stood up to fight this case, and they wanted to stop the delisting of this token.
An incredible argument was carried out last Friday by the SEC as they responded to John. E Deaton. SEC simply tried to avoid Deaton by establishing that they were still not settled on whether XRP was a security or not. Hence, they believe that his petition should be completely dismissed. This is where one is utterly shocked at how the SEC blatantly filed a lawsuit about something they are still not quite sure about; who will now account for the losses? Another question that arises is how they will not defend themselves and which segment exactly of the 193 Securities Act will SEC use to struggle its way out of the hole they dug up for itself? Lastly, what does it really take to operate lawfully in the United States?
On March 3, New York judges were sent letters by Garlinghouse and Chris Larsen (co-defendants) regarding ‘fair notice and due processes.’ The SEC’s response supported them as the Security and Exchange Commission failed to show up with their respective attorneys to attend the Zoom meetings to communicate effectively. Ripple had filed the Freedom of Information Act to ensure that the internal documents of SEC and communications could present that all those years, the developments that occurred relating to XRP didn’t go noticed as unclear. The SEC was moving in contradicting ways and only seems lost in their maze.
Another example of SEC’s confusion was observed when they sent a letter to the New York judge in a rush demanding that the ‘fair notice’ defense shouldn’t be accepted. They used the words ‘improper’ and ‘spurious’ to describe Ripple’s defense and urged for an immediate hearing. If things align with what SEC hurriedly demanded, it would raise suspicions,and Ripple’s FOIA request would come in handy to discover the hidden weaknesses.
William Hinman (former Director of the SEC’s Division of Corporation Finance) announced in 2018 stating that Ethereum (ETH) was not a security, even though it shares similarities with XRP.
“And putting aside the fundraising that accompanied the creation of Ether, based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions.”
One may wonder what internal work took place behind the decision of that announcement. Certainly, some crypto exchanges must’ve asked SEC whether the legal status of XRP is stable enough to list it. What did SEC respond to them for the guidance of usage of those tokens? Since 2013, Ripple and XRP holders have been working smoothly, and yet SEC did not take a single opportunity to question XRP’s status. Why did they choose not to interfere then?
Each development that we notice in this case makes it more and more shocking. The entire future of the U.S. cryptocurrency will be impacted by how this lawsuit pans out. Making enforcement through trials due to the arrogance of regulators is unethical, and through SEC’s actions, it is obvious that they do not care about the investors they swore to protect. SEC is demanding to be heard and viciously fighting the case with lack of evidence, but it realizes the waves it can create to damage companies. There has been a definite backlash, and it was witnessed not too long after the class action lawsuit.
However, an encouraging development was made this week as Rep. Patrick McHenry (R-NC), senior Republican in the House Financial Services Committee, may inaugurate a public-private working setting that is led by the Commodity Futures Trading Commission (CFTC) and SEC. Through this, they will begin a transparent regulatory framework for all digital assets. McHenry seemed eager and determined to put an end to the overreach of the agency. He mentioned it on a crypto regulation session in January in a ‘Real Clear Policy Panel’ discussion. This event took place on the same day President Biden had nominated Gary Gensler for the SEC chair position.
Gary Gensler stated regarding his Senate confirmation hearing in February how he believed that the SEC should stay within its capacities without using enforcement resources for events that don’t need to be addressed in the markets. Hence, it is now expected that Gensler may finally be the one to acknowledge this problem and settle the crypto markets by investigating further. He may invest SEC into McHenry’s working group rather than focus on the Clayton lawsuit that has already caused too much trouble for the agency.
Meanwhile, Ripple CEOs and SEC agreed on their timeline for arguments. They finally settled on dates concerning the discussion for a motion to dismiss. It may run through June 2021; the attorney James K Filan, who representsChristan Larsen –the former CEO Ripple, had tweeted a copy of the letter that SEC filed with the Southern District of New York. Filan will also be representing Garlinghouse in the SEC suit. The letter provides clear details that both sides have settled on dates to present their arguments and shreds of evidence relating to whether the defendant should dismiss the case.
The details specifically mention a request to the court for accepting their timeline. The defendants will open on April 12, 2021, and the SEC on May 14,2021. Later, the defendant will have time until June4, 2021, to reply and conclude if possible. Dates that have been mentioned are solely regarding the motion to dismiss from the defendants. It will provide clear insight nonetheless on what the bigger picture may turn out to look like.
For the Southern District of New York, the legal letter informed Judge Analisa Torres at the U.S District Court of a motion to dismiss, but the SEC’s complaint “still fails to state a claim against Mr. Larsen.” Mainly, the complaint is focused around Larsen “knowingly providing substantial assistance to a person in violation of [Section 5] of the 1933 Securities Act.” referring to the amended complaint filed in the previous month.
Hester Pierce, SEC Commissioner, stated that the SEC might potentially settle this out of court near the end as it often does.
“Often, you’ll see that the litigation ends in a settlement — sometimes it goes through and the litigation actually plays out in court.”
On the other hand, this cryptocurrency lawsuit is unlike any they’ve ever filed before, which is why there’s no guarantee whether this will be settled out of court. Overall, it is unlikely that this may end before summer 2021.
Ripple itself was stipulated formally by the Security and Exchange Commission in Dec 2020. XRP was charged by SEC for the sale of unregistered securities, and Garlinghouse and Larsen were accused of raising further $600 million by XRP sales. Ripple Labs rejected the charges, and they claimed that XRP functioned similarly to other cryptocurrencies price-wise.
Larsen’s lawyers, on those grounds, had stated that the SEC didn’t prove that he was aware at that time about XRP units being securities and continuing illegal activities.
“The SEC’s own allegations are not only deficient but affirmatively show it cannot meet this standard. At a minimum, the SEC must allege that it was ‘so obvious’ that XRP transactions were securities and Ripple’s conduct was improper that Mr. Larsen ‘must have been aware of it.”
The state of New York, cleared by the Financial Crimes Enforcement Network (FinCEN) in 2015, recognized XRP as a digital currency. The lawyers made several points regarding this, including that FinCEN and the Justice Department had both regulated XRP as a virtual currency, which is inconsistent with the claims of labeling XRP as a security.
Several corporate giants such as MoneyGram were involved with XRP trading for international transactions; however, many exchanges have delisted it. MoneyGram itself is currently facing a lawsuit as it allegedly misled investors about the cryptocurrency XRP. Even if the damage and case were to be folded soon, the damage would remain irreparable.
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