Does the court ruling on the three-year-long Ripple case have epoch-making significance?

Author: Jaleel, BlockBeats

Editor: Jack, BlockBeats

Last night, Ripple Labs' three-year lawsuit with the U.S. Securities and Exchange Commission (SEC) finally reached a conclusion. Ripple won in the U.S. District Court for the Southern District of New York, with Judge Analisa Torres ruling in favor of Ripple Labs, stating that XRP is not a security. According to the court's ruling, using XRP to invest in others, issuing grants with XRP, and transferring XRP to executives are not considered securities.

After Ripple's victory in declaring XRP not a security, the overall sentiment in the cryptocurrency community seems to be jubilant.

In response to this news, XRP exhibited a significant upward trend, briefly breaking through $0.9, rising over 92.89%. As of the time of writing, it is quoted at $0.5432. Bitcoin and Ethereum also experienced a brief surge, with Bitcoin breaking through $31,800 to reach a new high for the year, and Ethereum surpassing $2,000. Cryptocurrencies such as SOL, ADA, and MATIC, which were previously classified as securities by the SEC, also saw significant gains.

Ripple CEO Brad Garlinghouse emphasized that the most important part of the ruling is that XRP is a digital token, not a "contract, transaction, or scheme" that embodies the investment contract requirements of Howey, and this is now a legal issue that cannot be contested. "We said back in December 2020 that we were on the right side of the law and would be on the right side of history. Thank you to everyone who helped us make this decision today—this decision is for all cryptocurrency innovation in the U.S. More will come in the future," Brad Garlinghouse stated on Twitter.

Epic Tug-of-War in the Crypto Space

Ripple's history dates back to 2004, when developer Ryan Fugger created the project "RipplePay," aimed at establishing a peer-to-peer payment network that could replace the banking financial system, sounding very similar to Bitcoin.

Ripple gained community attention primarily due to its $1.5 million funding round in April 2013 from institutions such as Google Ventures, a16z, IDG Capital Partners, Lightspeed Venture Partners, Bitcoin Opportunity Fund, and Vast Ventures.

In addition to endorsements from firms like Google Ventures and Lightspeed Venture Partners, Ripple also seemed to have backing from a Japanese consortium. In September 2016, the Japanese consortium SBI Group acquired a 10.5% stake in Ripple for $55 million, and the two parties collaborated to establish SBI Ripple Asia in 2017, with SBI Group holding a 60% stake.

On January 4, 2018, XRP's price surged to an all-time high of $3.31, with an increase of over 500 times in a year, and its total market capitalization comparable to that of Google, Apple, and Alibaba. Larsen's net worth of $59 billion pushed him past Zuckerberg to become the fifth richest person in the world. Of course, he was also labeled as "the billionaire with the least contribution to the real world."

The lawsuit between Ripple and the SEC dates back to 2020.

The Start of the Legal Tug-of-War: Is XRP a Security?

On December 22, 2020, the SEC officially filed a lawsuit against the cryptocurrency company Ripple Inc. According to the SEC's official website, the targets of the SEC's charges were Ripple, its CEO Brad Garlinghouse, and co-founder Chris Larsen.

The allegations claimed that the defendants raised over $1.3 billion through ongoing, unregistered digital asset securities offerings since 2013, such as labor and market-making services. In addition to organizing and promoting XRP sales to fund company operations, Chris Larsen and Brad Garlinghouse also conducted unregistered personal sales of XRP totaling approximately $600 million, violating the registration provisions of the Securities Act, and sought injunctive relief and civil penalties.

After the SEC's formal lawsuit announcement, Ripple's token XRP plummeted in price. Within 48 hours, XRP fell from 0.58 USDT to as low as 0.34 USDT, with a maximum cumulative decline of 42%.

Ripple CEO Brad Garlinghouse bluntly stated, "From a legal and factual standpoint, the SEC is wrong." The Ripple team seemed to show no signs of a settlement: "There is no doubt that we are ready to fight and win—this battle has just begun."

The lawsuit revolves around whether the digital asset XRP, launched by Ripple in 2012, should be registered with the SEC. Registration involves disclosing a company's business model, risks, and financial status to the SEC and the public. The SEC reviews the information disclosure and provides feedback to investors to improve the disclosure.

Subsequently, both parties began a legal tug-of-war, with the focus still on whether "XRP is a security."

No Settlement, Lawsuit Enters Heated Phase

"This is a little secret of the U.S. court system: even 10% of cases cannot be tried. Judges always pressure lawyers to settle because the fact is, if more cases have to be tried, the system will collapse. There simply aren't enough resources. This is true for both civil and criminal cases," noted prominent lawyer Jeremy Hogan on Twitter.

Jeremy Hogan stated that in the U.S., less than 10% of civil and criminal cases ultimately go to trial, due to resource pressures that prevent the legal system from handling a higher volume of cases, with only a small portion ultimately being tried. He added that judges, well aware of this fact, often pressure the lawyers of both parties to facilitate a settlement.

As a result, many speculated that the SEC might attempt to reach a settlement with Ripple, but unexpectedly, both the SEC and Ripple maintained a surprisingly firm stance.

On February 15, 2021, in a letter jointly submitted to U.S. District Judge Analisa Torres in the Southern District of New York, the SEC, Ripple, and the two founders all stated that the likelihood of "settlement before the pretrial conference regarding Ripple's alleged securities violations" was very low.

The lawyers for the parties involved had negotiated and concluded that there was currently no prospect for resolving the issues. The letter noted that previous settlement discussions took place under the Trump administration and in the context of a former department head who had already left the SEC. But the situation has since changed.

When the SEC formally filed a lawsuit against Ripple in late December 2020, Ripple CEO Brad Garlinghouse described the action as an attack on the entire cryptocurrency industry. He also stated that he and Ripple Chairman Chris Larsen could choose to settle. However, considering his beliefs, he rejected this option to prove his point and pave the way for others in the crypto industry.

"Chris Larsen and I could choose to resolve this separately. We could do that, and it would all be in the past. That hasn't happened; this is Chris Larsen and my confidence that we are right. We will actively fight and prove our case. Through this case, we will establish clear rules for the industry here in the U.S.," Brad Garlinghouse said.

Gensler's firm stance is not only about competing for crypto regulatory authority but also stems from dissatisfaction with the myriad of operating models in the cryptocurrency space. The dazzling array of options makes it easier to breed gray areas. According to foreign media reports, SEC Chairman Gensler recently testified before Congress, criticizing the compliance of cryptocurrencies and expressing concerns about stablecoin regulation. He stated, "I have been in finance for 40 years and have never seen a field so non-compliant with securities laws." He also confirmed that if cryptocurrency tokens are considered securities, any exchanges trading such tokens would need to register as national securities exchanges and be subject to SEC regulation. Gensler's approach to regulation is extremely firm, insisting on maintaining existing regulatory guidelines without making significant changes.

This dispute will set the tone for future U.S. regulatory rules and will influence the direction of the cryptocurrency market. Therefore, the victory of one party will inevitably compress the rights space of the other, leading to a stalemate.

A lawyer involved in the lawsuit previously noted that the SEC's own experts acknowledged that since mid-2018, the prices of the two major crypto assets, Bitcoin and Ethereum, could explain up to 90% of XRP's price fluctuations. Meanwhile, the SEC argued that Ripple Labs' high proportion of XRP holdings meant that XRP was centralized and a security. These two statements and positions contradict each other.

Final Verdict?

Coinbase Chief Legal Officer paulgrewal believes that according to page 15 of the ruling: "XRP, as a digital token, is not itself a 'contract, transaction, or scheme' that embodies the investment contract requirements of Howey." And on page 25: "Ripple's programmatic sales of XRP on digital asset exchanges do not constitute offers and sales of investment contracts." XRP has already met the listing criteria.

"We have read Judge Torres's thoughtful decision and carefully reviewed our analysis. It is time to relist XRP," paulgrewal stated on social media.

According to Fox News reporter tweet, the SEC also responded to the court's ruling that XRP is not a security last night:

"We are pleased with the court's ruling, which found that Ripple, in certain circumstances, offered and sold XRP tokens in violation of securities laws as investment contracts. The court agreed with the SEC's view that the Howey test determines the securities analysis of crypto transactions and rejected Ripple's self-created test for what constitutes an investment contract, emphasizing that Howey and subsequent cases have ruled that various tangible and intangible assets can be the subject of investment contracts. Additionally, the court dismissed Ripple's fair notice argument, stating that the Howey test is clear, and claiming ignorance cannot serve as a defense against violating securities laws. We will continue to review the court's decision."

The Ripple Case: The Good and the Bad

Cinneamhain Ventures partner Adam Cochran tweeted that this is primarily very good news for all altcoins. After all, for XRP, this is an unexpectedly significant victory.

Throughout the lengthy three-year lawsuit, XRP's price fluctuations have become a clear reflection of the community's sentiment regarding the lawsuit. Earlier, reports predicted that Ripple might win its lawsuit against the SEC, and upon hearing this news, the XRP token surged over 20% within just 24 hours. Recently, the spike in XRP's price has also benefited from the active support of several well-known YouTubers and influential community figures. They firmly believe that Ripple will win the lawsuit, which has significantly driven up the price of XRP. Moreover, just in the early hours of the ruling announcement, XRP's increase astonishingly exceeded 92.89%.

Secondly, according to the ruling, the judge indeed determined that the institutional sales/fundraising activities constituted securities transactions.

However, the programmatic sales on trading platforms did not meet the third prong of the Howey test. This means that sales to users through exchanges are permissible, as long as they are conducted through an order book and not through ICOs/IEOs/Launchpads, etc. This also implies that one major winner here is the exchanges. If institutional sales, over-the-counter transactions, and direct token sales are securities, then all sales will flow again through public order books. There will no longer be billions of dollars in convertible financing in the early stages.

After all, XRP is one of the more centralized foundations, with key leaders, conducting standard sales through trading platforms and establishing formal distribution plans. If XRP is not a security, then almost everything sold through trading platforms is not a security. If XRP is not a security, it is evident that BTC and ETH are also not securities.

This also seems to imply that the Bitcoin ETF applications submitted by Wall Street giants like BlackRock may have a chance of success.

Adam Cochran also pointed out that it is important to note that this is a ruling on a motion for summary judgment, so further trials and appeals can still occur. This does not mean the case is closed, but it is a very significant victory, and the reasoning is sound.

Although the case has not officially concluded, the entire Ripple vs. SEC lawsuit is a true reflection of the current U.S. cryptocurrency market. The emerging crypto market still faces many uncertainties in terms of regulations and oversight. Due to the lack of clarity in the scope and responsibilities of regulation, crypto companies find it difficult to stabilize their expectations regarding regulation. The crypto market urgently needs a clear regulatory framework to reduce potential market chaos.

The outcome of this lawsuit may become a turning point for crypto regulatory reform, holding epoch-making significance.