SEC vs Ripple: The Cryptocurrency Lawsuit of the Century

SEC vs Ripple: The Cryptocurrency Lawsuit of the Century

January 3,2021 in Blog posts | 1 Comment

A few hours before Jay Clayton, Chairman of the Security and Exchange Commission (SEC), exited the building on December 23 upon completing his tenancy, SEC listed a lawsuit against Ripple Labs Inc. SEC testified that it generated more than $1.3 billion through sales and disseminating digital assets of the XRP without notifying.

Ripple, established in San Francisco in 2012, runs the RippleNet and the XRP reimbursement protocols, known as preferable to bitcoin with its enhanced records, quicker settlement pace, and digital wallet for foreign transactions beyond 55 countries. Ripple is one of the industry’s giants for the new crypto industry in the United States, creating real-economy products from innovative technologies.

Ripple’s blockchain-like trade network claims to be a systematic, general, and low-cost complement compared to usual payment networks such as Society for Worldwide Interbank Financial Telecommunication (SWIFT) and others, and more.

The SEC suit does not claim deception but inquires about undefined losses. It aims to prevent Ripple’s administration from engaging in the business of the digital asset market. The lawsuit challenged one of the beneficial characteristics of Clayton’s 2017; statement on Cryptocurrencies and Initial Coin Offerings. It was to be kept in mind that these “disruptive, transformative and efficiency-enhancing” advancements could “facilitate capital formation and provide promising investment opportunities for institutional and Main Street investors alike.”

Furthermore, the lawsuit assures Clayton’s declaration in which he declared the highest SEC authority to manage all digital assets possible, despite its composition, purpose, and use. After the lawsuit, the prices for XRP bolstered by 25 percent even when some business operations did not function.

Ripple launched a dynamic reply, describing the lawsuit as an offensive initiative on the rising cryptocurrency business. The trial has some intriguing resemblances to telecommunications, in which managers apply outdated regulations to govern novel technologies, underestimating the competition in the United States for creativity.

Clayton’s last strategy was his most bold move towards the technological industry he worked for four years in, trying to control by authority alleged from a 1934 ordinance. Concerning possible assumptions, the lawsuit is becoming the crypto trial of the century.

Some of the chief complications are listed below:

Currency or Security?

A fundamental question that arises is if XRP is a security or a currency. A currency refers to as a means for trade and reserve of value, such as dollars, gold, or frequent flier miles. While, security comprises of the monetary investment agreement, generally negotiable like a stock or bond. All of this is important as various legislations and ordinances apply. In the year 2015, the US Departments of Justice and Treasury settled, as a component of an agreement with the FinCEN (Financial Crimes Enforcement Network); XRP is indeed a currency. Certainly, Ripple has followed the guidelines maintained for digital currencies with distinct companies for 5 years, including currency compliance and operating beyond several countries. Ripple perceives the XRP ledger as a localized unrestricted-resource, functioning through the consent of a developing society of consumers and initiators creating original commodities through XRP. XRP is not an investment agreement in their firm, and it is something that they cannot regulate. If investors wish to invest in Ripple, they need to acquire shares in the firm instead of purchasing XRP.

This resolution did not deter the SEC from declaring that Ripple’s methods with XRP sum to  investment contracts under the Howey test and thus need exposures as “securities.” The SEC filed similar lawsuits challenging other cryptocurrencies like Grams from Telegram and Kik Interactive tokens. It induced stress as a result of the cryptocurrency world as America’s eight monetary regulators fight for supremacy in financial technology.

If investors want to finance in Ripple, they will acquire shares in the company itself, not XRP.

This decision did not deter the SEC from challenging Ripple’s methods with XRP equaling to  investment contracts under the Howey test and thus needs disclosures as “securities.” The SEC has filed alike lawsuits against other cryptocurrencies like Grams from Telegram and Kik Interactive tokens. It has caused tension in the cryptocurrency world as America’s eight financial regulators fight for obtaining supremacy in financial technology.

Administrative Limitations:

The lawsuit demonstrates an important administrative overreach. Individuals with a rational approach will admit that even how appealing financial technology maybe, Congress, not administrators, determine what requires a regulation. The cryptocurrency industry requests a logical structure, though Congress regrettably has spoken less regarding cryptocurrency. This act has left regulators to form their very own laws. This advancement is similar to ordinances of broadband internet, which has a transitory association in the Telecommunications Act of 1996. With no Congressional structure in position, the Obama Federal Communications Commission (FCC) strived to manage the internet with the rules intended for price control of the telephone.

Asserting that the internet is simply a continuation of the telephone network, FCC Democrats developed a policy intended to defend Silicon Valley giants in the disguise of assisting customers. The gambit issued a decade of lawsuits and impeded billions of dollars invested in novel broadband networks, stripping broadband network administrators of the capacity to reclaim costs while initiating a digital divide in provincial areas.

Concerning the Ripple Lawsuit, a republican bureau as a “deregulatory” administration implies defending customers by challenging currency innovators.

The before-mentioned strategy is a typical indication of regulatory obsolescence and retains lawyers in a company in federal courts.

Do Administrators Protect China or US Consumers?

Though exposure is identified as a significant feature for an operating market and customer security, it is distinguishable that SEC has permitted hundreds of Chinese companies with a cumulative value of $2.2 trillion to record on US negotiations without disclosures or audits of accounts for up to two decades which jeopardized US investors.

At the beginning of this year, the bilateral US-China Commission submitted it in a report

Earlier this year the bipartisan US-China Commission submitted this in a statement to Congress and reported whence China savors the profits of America’s monetary markets, while it concurrently topples world models.

Nevertheless, it appears as if America’s nestling cryptocurrency industry was the center of Clayton’s rage, and not China’s.

During a certain event, customers are frequently attracted to Ripple and cryptocurrencies specifically to evade the costs and complications of conventional, highly-administered fiscal services, a pattern that illustrates creativity often offers better outcomes than regulations. Furthermore, the notorious deficit expenditures by the US government reduces the value of the dollar and directs investors and customers towards more understandable, localized money like cryptocurrency.

What is the US approach for Cryptocurrencies and Blockchain?

The contradicting methods amidst US regulatory enterprises speculate the absence of an administrative framework. Though unrestricted creativity has aided innovation, administrators left that remain unaccountable will endeavor new guidelines to administer.

Previously, this strategy may have been not crucial, but now the US confronts an existential financial and security dilemma with China which is bound to replace America. Perceiving that the US has not been successful with its cryptocurrency act, China has decided to circulate its digital currency, create a blockchain ledger, and lead the technology’s application in the domestic economy.

Clayton’s displacement can reset the framework that is much required. Though the SEC Chairman might acquire an erroneous trial, he does not need to implement the same flawed policies. Significantly, Congress should be formed in 2021 and initiate an appropriate framework for cryptocurrency; to assure US administration and simplify administrative boundaries.

Speaking of 2021, Jesse Hynes in a series of tweets has demonstrated facts concerning the timeline of the SEC v. Ripple case, he wrote, 

“Let’s briefly talk timeline for the SEC v. Ripple case (I will provide a better breakdown on Coil). A Pretrial Conference has been set with Judge Torres on February 22, 2021. The point of this conference is to determine if there is a hope of settling and discovery dates. The case will not be decided on this date. Discovery is the process by which parties learn basically everything they can about the other side’s facts. They get to request documents and take depositions (interviews). Learn about all fact witnesses and any documents, etc etc. Judge Torres generally sets a 120 day period for fact discovery (which may be shortened if there are exigent circumstances). From that 120 days period, Judge Torres then allows 45 days for Expert discovery. The final pretrial submission date is 30 days after. Then the trial is set thereafter. So, if this goes to trial, at best you are realistically looking at after195 days from February 22, 2021, which is September 5, 2021, but that is unlikely. There are always delays and consents to push back dates and extend discovery. I will be able to give you a better timeline when Judge Torres sets the discovery timeline on February 22.”

Jesse Hynes’s tweets describe the current timeline scenario for the SEC v. Ripple case.  Judge Torres has fixed a pre-trial conference with him; to ascertain concerning future dates of discovery and so that settlements can be pre-determined. He also mentions that determining the case’s conclusion on the previously specified date will not be possible.

In his tweets, he describes the process of discovery in the court of law. As stated, discovery refers to the method through which both parties can acknowledge facts about each other that can include everything. Parties are permitted to request documents and as well as to conduct interviews. Discovery allows both of the parties to learn about the witnesses and case documents presented about each other.

Moreover, Jesse Hynes tweets that Judge Torres usually sets 120 days for discovering facts; in severe cases, the Judge schedules a lesser period. From 120 days onward, Judge Torres will allow for a subsequent period of 45 days for expert discovery. Lastly, the Judge conducts a final pre-trial submission 30 days after.

Further, Jesse Hynes states that a trial sets after this. So, if we fast forward 195 days from February 22, 2021, that will be September 5, 2021. The possibility of something happening like this is unlikely as there are always unplanned delays due to consents, push back dates, and extended discovery.

Jesse Hynes concludes by stating that he will provide a better timeline for the SEC v. Ripple case as soon as Judge Torres sets a discovery timeline.

SEC forewarned about loss for investors, legal expert states

The magnitude of the SEC enforcement actions sent waves through the framework; one such person who noted that the U.S. Security and Exchange Commission (SEC) was aware of their investors losing billions was John E. Deaton. Mr. Deaton is a lawyer that has often dealt with the cryptocurrency and blockchain sector amongst various other legal issues. This enforcement action against Ripple’s XRP, which is one of the biggest digital assets regarding specifically market capital, would come to create a significant loss for its investors.

Furthermore, a tweet by John W. Deaton mentioned that XRP, SEC, and Jay Clayton (Chairman of the SEC) were informed before the filing of the lawsuit by Joseph Grundfest (Former Chief).

Reportedly, Deaton claims that Grundfest had already alarmed Jay Clayton (Chairman at that time) via a letter. He says that the SEC and Chairperson knew way beforehand about the later circumstances. They were forewarned that ‘declaring XRP an unregistered security’ would result in an “unprecedented scenario of billions of dollars in losses resulting from an exodus of intermediary market services providers.” All of this was seen coming by the former chief, and it was reported forward. Deaton also noted that a mass departure was in process by the market service mediators.

XRP trading has now been put to a stop for US-based consumers by most service providers such as Kraken, crypto exchange Coinbase, etc. Later on, Deaton even confirmed how companies like Grayscale and Bitwise liquidated their XRP holdings and shares. He continued by talking about how the trading of XRP was known to be public in the United States through implied permission granted by the SEC. XRP’s trading extended globally to about 200 countries. Grundfest had thoroughly talked about the consequences that would be witnessed if SEC were to file a lawsuit. SEC’s enforcement action would announce XRP as an unaccounted for security agency, leading them to have no choice but to be removed from the list or stop their trading completely due to a fear of more action lawsuits against them. They would’ve been stuck without any chance of revival after being delisted.

Deaton added:

“Grundfest informed Clayton that he was aware of no instance in which the simple announcement of a commission’s enforcement procedure has, absent allegations of fraud or misrepresentation, caused multi-billion-dollar losses of innocent third parties.” 

The company CEO Brad Garlinghouse and founder Chris Larson stated there were no deception allegations in the SEC’s complaint filed against Ripple Labs -the Fintech firm. Clayton and Grundfest had a conversation where Grundfest appealed how no immediate action should need to be taken as there were no pressing reasons to do so. XRP had been already trading for seven years, and no such fraud had been alleged previously ever before.

“Others like @BitwiseInvest and @Grayscale have liquidated their XRP holdings. Remember, XRP has been publicly traded in the U.S. and globally for SEVEN PLUS YEARS with the SEC’s full awareness and implicit permission. The SEC was aware that XRP was actively traded on over 200 exchanges globally, including in the U.S. Clayton was.”

Grundfest’s claims regarding motives of the SEC

This was ignored by the SEC and Clayton as they put it aside. Billions of dollars were lost by new investors that were just getting started. They were innocent to all of this; however, SEC claimed in its file how this was the most ground-breaking case in history, according to Deaton. The real motive of Clayton and SEC was questioned by Grundfest as there was no urgency that was truly needed to file this case. The commission’s tactfulness and discretion were questioned at this point, as traditional laws that have existed were not applied to Ethereum (ETH) Deaton mentioned as Grundfest quoted.

Furthermore, he concluded by saying that, in short, Grundfest’s claim to be that if XRP is a security, then so should ETH be. The laws should apply to both. According to his tweet, Grundfest had basically gone on record to state that there were underlying suspicious reasons because of which XRP was being held accountable. Grundfest believed it was completely biased and unfair to take this enforcement action against XRP, claiming it as a security. Grundfest deeply expressed how the reasons behind SEC and Clayton doing such a thing were definitely unrelated to the law itself.

It was already known previously that the SEC had deemed Bitcoin and Ethereum as non-securities (BTC and ETH), and before this lawsuit, XRP was the third biggest Cryptocurrency in the world. When interviewed, Clayton responded by saying, “if it’s a security, we will regulate it,” even when repeatedly being asked about XRP on CNBC. This interview was held alongside the period where it was claimed by the SEC that Garlinghouse and Ripple are involved in fraud regarding selling illegal securities in the form of XRP. SEC declared that they were actively selling; however, in the interview, Clayton did not respond in line to their declaration, which raises questions about their credibility. BTC and ETH were declared non-securities; nonetheless, Clayton did not ever affirmatively declare XRP as one.

Deaton added:

“Clayton and others were well aware that the mere filing of the enforcement action, not limited to specific distributions of XRP directly from Ripple, but alleging that all XRP constitutes securities, could prove to be a ‘Kill Shot’ against Ripple and XRP. Considering the magnitude of this case, one would think that Clayton and the Enforcement Chief would certainly want to see it through. But, instead, they both left the SEC forever.”

Clayton leaves without dealing with the aftermath

The SEC had also granted permission to Ripple to make a purchase, and they hence invested $50 million where they bought around 9% of MoneyGram International (MGI) – that is a public company. They used their digital asset XRP as SEC was already aware of and gave full permission to do so. These apparently claimed ‘illegal securities’ were fully utilized, and SEC watched as they were. Innocent investors who had no idea about the work going on in the background and not being aware of MGI or Ripple were invested and faced severe stressful losses, as the seller’s identity remains anonymous in dealings. Their digital wallets and individual accounts were held even though the investors had no clue about Ripple itself. Clayton, after his tenure, ended leaving a direct action to be filed where he named the third-largest Cryptocurrency XRP to be a fraud and defiant. He claimed that it will always remain unregistered security. The question is, who will attend to this matter now?

Tetragon Lawsuit: Opportunistic or Bad move?  

Recently, there was news about how Ripple was sued by a company named Tetragon FinancialGroup Limited (LSE: TFG), an investment firm based in the U.K. The firm has $2.35 billion in assets under management and sued Ripple in Delaware court. This action took place because it was pre-determined that if XRP were to experience a lawsuit of this intensity claiming it to be unregistered security, Tetragon would receive its money back. Tetragon had this mentioned in terms of its equity investment. Not only that, but Ripple was also sued by the US SEC, Security and Exchange Commission, regarding further claims and allegations of XRP being sold as an unregistered security. However, it was reported on March 6, 2021, by Stuart Alderoty that the Judge has ruled Tetragon’s claim to be incorrect. Stuart is a General Counsel at Ripple Labs Inc., and he tweeted about the latest statement that denies Tetragon’s appeal for a preliminary injunction.

This took place in a court in Delaware; the ruling stated that XRP is not determined security by the SEC.

Delaware Judge stated:

 “But XRP is no more a security after the SEC filed the enforcement action than it was before it. A determination …resolves the question of whether XRP is a security. The enforcement action, by contrast, asks that question. The question is not yet resolved, so a determination has not yet been made. And when it is made, it will be made by the District Court.”

Stuart Alderoty tweeted:

 “The SEC also responded to @JohnEDeaton1’s case on behalf of XRP holders and confirmed what we said on Day 1: their complaint against Ripple is just allegations. The Court presiding over the SEC’s case is “the exclusive method for testing the validity” of those allegations. The Tetragon ruling, coupled with the SEC’s filing in @JohnEDeaon1’s case, should put to rest the FUD that the SEC unilaterally determined that XRP is a “security.” Glad that’s settled!”

Tetragon jumping on board in order to benefit from the lawsuit is simply an opportunistic move. They tried to take complete advantage of SEC’s allegations while SEC has to prove its case yet. It is disappointing how innocent investors were hurt in this process even though they were unsure.

Hope for Ripple Regardless of Losses

ETH being let go untouched while XRP is held against a lawsuit was harsh, unpredictable, and worthy of questioning motives. Either way, the losses that occurred were unprecedented. There was no leniency, and all of XRP, including the ones owned by petitioners unaware of the bigger schemes, were declared as securities. The damage that occurred was irreparable; it was a devastating loss and shook the entire cryptocurrency kingdom. XRP was delisted, and there was a halt in the purchases of its products. The result of the lawsuit did exactly what everyone feared it would and halted most of their exchanges, and some companies liquidated all of their XRP holdings within just a couple of hours. Economic losses were to be suffered, and the retirement savings of several innocent individuals were almost wiped out entirely. The psychological damage needs also to be taken into account, as this moved people into a completely depressed state with discussions on Twitter regarding suicide. XRP’s value has been diminishing and will continue to fall.

Another interesting perspective was shared by Stefan W. Huber, Co-president of the Canton of Zug at the Green Liberal Party in Switzerland. He tweeted on February 28 regarding the matter of the cryptocurrency scandal.

Stefan W. Huber tweeted:

“I would like to learn more about the cryptocurrency #xrp: It strikes me that Ripple / XRP is an absolute no go for a lot of people, to which they react extremely emotionally and irrationally. Why is that so? I understand that the company with its partnerships with banks seems to contradict the basic idea of a blockchain revolution at first glance. I can also understand that some people are bothered by the decrease of the value of the coin because they have made losses with it. But let’s leave these subjective opinions and experiences aside. Why should xrp be a scam and have no potential? 1. Google Ventures and other notable players are behind Ripple 2. No other company has a comparable network 3. The energy efficiency of the system fits like a glove with the Biden administration 4. Ripple’s goals are aimed at a regulated market (which will come sooner or later) like no other company. 5. this is exactly why, the XRP price suffers especially from the ongoing investigations – even in the last years because – their business model relies on regulation. 6. after a SEC settlement, not only will institutional interest drive the price of xrp, the short term fomo will drive the price to irrational heights. 7. is the case by the SEC extremely weak – Ripple currently has much stronger arguments in my opinion. 8. the US government has the utmost interest in strengthening an American player like Ripple, which plays such a significant role in Asia, the most important market of the future, and even expand its influence in the future.”

He highlighted some very valid points regarding how it seems irrational for people to react in such a devastating manner towards their losses. Although collaboration with banks for such companies may make one uneasy towards calling it a block-chain revolution and watching the coin diminish in value seems troubling, Huber called it merely subjective. XRP has a lot of potential still even after this massive accusation. The reason behind this is that Ripple is backed up by big players in the industry, such as Google Ventures. In addition, the network system and efficiency Ripple offers are unlike any network seen before. The system itself is so intricately designed that it fits with the governmental administration of Biden and that supports Ripple’s own objectives. In a political aspect, the U.S. shares a great interest in promoting Ripple. It needs to be noted that Ripple plays an important role in Asia, and that is where the market needs to be targeted the most. There needs to be extensive work done, and if its potential isn’t realized, the administration will face disappointment sooner or later.

Similarly, there are several discussions over what the potential reasons could be behind filing such an aggressive action lawsuit. Some believe it’s to force a settlement, or maybe they’re engaging in this to regulate the market. XRP may now be rendered as not possible for trade at all, and it is absurd that such a claim was made after seven years of running. However, Clayton and the SEC need to acknowledge how this was emphasized, and an extreme reaction was foreseeable. They disrupted everything they stood for against their morals and principles and did not protect the investors they swore to protect. There was immense tension seen publicly rising between Ripple, the Trump administration, and Clayton. The U.S. is falling behind China and may very soon lose the global edge in the cryptosystem. Unfortunately, clarity was not provided enough, and it is still unclear why so many had to suffer. Nonetheless, with good faith, petitioners use the Petitioners Memorandum of Support and a ton of evidence to legally fight and prove that today’s XRP is not a security.

It is important that the importance of maintaining the integrity of Ripple and XRP is beneficial for the U.S. Other countries have begun to further realize its potential and that can be seen, as a report called “Central Bank Digital Currencies (CBDCs): A Comparative Review” was published. In the document, French Central Bank discusses Ripple and XRP as a possible way to launch the digital euro. Bitcoin and Ethereum were not even seen as worthy competitors as it’s either too risky or too decentralized. Ripple was seen as an ‘alternative platform to Ethereum’ and the authors mentioned in the document that it is also relied upon by multiple banks as a model for CBDC due to its brilliant centralization. Recently, in an interview of Ripple CEO, Brad Garlinghouse explained on Axios on HBO that losing a lawsuit would affect the US negatively in the long run. The United States will be at a competitive disadvantage and that would be a bigger loss for them as the US is the only one that declared XRP as not a security. He has asked for clearer crypto regulations in the field.

Sources

SEC Writ_01.01.21.pdf (dropbox.com)

https://ripple.com/ripple-press/our-statement-on-order-denying-tetragons-request-for-preliminary-injunction/

https://twitter.com/JohnEDeaton1/status/1350877091462598659

https://twitter.com/s_alderoty/status/1368037798649954312?s=21

https://twitter.com/leerzeit/status/1365742747483860992?s=21

https://twitter.com/axios/status/1368710554592845824

https://u.today/central-bank-of-france-eyes-xrp-as-basis-for-digital-euro

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Reader comments:

Jocelyn
20th March 2021 at 21:01

Hi, do you think the SEC will put down the case?

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