The Ripple vs SEC Lawsuit is Over But Has Anything Changed?

The court ruling declaring that Ripple Labs‘s XRP token should not be considered a security when sold to the public on digital asset exchanges sparked excitement within the cryptocurrency industry in July 2023. 

The verdict brought some hope for clarity in the regulatory landscape surrounding cryptocurrencies. However, despite this victory for Ripple and the crypto community, the fight for clear crypto regulations is far from over.

The SEC and Ripple case is nearing after the discovery phase concluded on February 20, 2024. There are only a few key deadlines left, after which Judge Analisa Torres is expected to give her verdict.

This article captures the highlights as the case played out, with just a few chapters left to go in the saga.

Judge Ruled XRP Is Not Security When Sold to Public in Landmark Case

In July last year, Southern District of New York judge Analisa Torres ruled that the XRP token is not a security when sold to the general public. However, she did mention that it can be treated as a security for past XRP sales to institutional clients. 

This verdict was seen as a win for both Ripple Labs and the crypto community, giving them some leverage in the ongoing battle for regulatory clarity. But Ripple’s chief legal officer, Stu Alderoty, cautioned that the fight was not yet won.

The Securities and Exchange Commission (SEC) expressed disagreement with the court’s ruling. In legal documents for a separate case against Terraform Labs, the SEC claimed that the ruling was “wrongly decided” and that the court should not follow it. The agency also stated that it is considering other options for further review. 

"It was a big big win for Ripple and a big big win for the #crypto community," says @novogratz after a judge ruled $XRP is not a security. "Let's not let Gary Gensler put lipstick on a pig. They lost and they know it." pic.twitter.com/sUwjQ2mJ5b

— Squawk Box (@SquawkCNBC) July 20, 2023

Furthermore, on 9 August 2023, the SEC sought permission to appeal parts of the decision, claiming that there are multiple other pending court cases that could be affected depending on the appeal’s outcome.

“These two issues involve controlling questions of law on which there is substantial ground for differences of opinion, as reflected by an intra-district split that has already developed.”

However, Alderoty believed the judge made the correct decision based on the law. He said on an episode of TechCrunch’s Chain Reaction podcast:

“We think the judge got that right, and we think that was a faithful application of the law, and I think a court of appeals will not only affirm that but maybe even amplify that to even a greater extent.” 

He expressed the hope that other judges will see the SEC’s position as misguided and will take inspiration from the judge’s decision in the Ripple case. However, he emphasized that the focus should be on creating the best regulatory framework to protect the integrity of the market. 

Without a comprehensive regulatory framework, the United States risks losing its advantage in blockchain innovation and falling behind other countries in the crypto industry. He added:

“Without that, I don’t think the crypto industry and the technology behind it, the brilliant entrepreneurs that are driving it, will be able to really realize the full potential of this technology in the US, and it’s going to continue to move offshore.”

SEC’s Regulation by Enforcement in the US Drives Away Crypto 

After some prominent bankruptcies in the cryptocurrency industry, including the failures of FTX and BlockFi, regulatory agencies in the United States began adopting a more hostile stance. Specifically, the CFTC and SEC took aggressive measures against the crypto industry. 

In March 2023, the CFTC filed a lawsuit against Binance and its founder Changpeng “CZ” Zhao, alleging that the exchange knowingly provided unregistered crypto derivative products in violation of the law. Similarly, the SEC reached a settlement with Kraken to cease offering staking services to clients in the country and pay $30 million in fines.

Subsequently, the SEC sued both Binance and Coinbase, two of the world’s largest cryptocurrency exchanges, for selling unregistered securities and other alleged misconduct.  

Meanwhile, crypto companies are not waiting for the resolution of these cases. Many major US-based crypto companies are considering relocating to more favorable countries. 

Coinbase has already established a presence in Bermuda and may launch an international exchange. Additionally, Bittrex, formerly based in Seattle, has ceased operations in the US, and Gemini, another large US exchange, is contemplating a move to the United Arab Emirates.

According to an April 2023 report by Electric Capital, the US’s share of blockchain developers declined over the previous five years. This decline, including a drop from 40% in 2017 to 29% in 2020, suggested that the regulatory uncertainty in the US might be driving crypto away. 

The SEC and Appeals

While the court ruling in favor of Ripple Labs generated positive sentiment within the crypto community, the fight for clear crypto regulations continued. The SEC’s disagreement and moves to appeal show that there are still hurdles to overcome. 

Will The SEC Appeal? @JohnEDeaton1 pic.twitter.com/za231sIOdE

— Digital Asset Investor (@digitalassetbuy) July 25, 2023

If the SEC’s appeal won, it would strengthen the commission’s position and affirm its assertion that XRP is a security. This outcome would likely lead to stricter regulations and potentially severe consequences for other cryptocurrencies that share similarities with XRP. 

On the other hand, if the SEC’s appeal failed and they lost the case against Ripple Labs, it would be a significant blow to its authority and jurisdiction over the digital asset sector. Such a loss would indicate that the SEC’s current regulatory framework may be insufficient or inappropriate for the evolving crypto landscape.

Furthermore, the agency may have to recalibrate its approach to regulating cryptocurrencies. It could push the commission to reconsider its classification of various tokens and encourage it to revise the existing regulatory framework or extend a new one specifically for cryptocurrencies.

This may involve engaging in dialogue with industry experts, lawmakers, and market participants to develop a more inclusive and effective regulatory system.

Nevertheless, the lawsuit has, for one, highlighted the need for clearer regulations within the crypto space. Whichever party prevails, it is expected that this case will prompt the SEC to provide more comprehensive guidelines for the industry, whether it be through new precedents from successful lawsuits or changes to the guidelines themselves.

“[The ruling] underscores the need for regulatory clarity and consistent standards across different types of participants and transactions,” said David Shargel, partner at Bracewell LLP.

“The distinction will continue to fuel questions about the legalities and regulatory frameworks surrounding cryptocurrency sales and distribution.”

Judge Torres Rejected SEC’s Motion to Appeal its Loss

On October 3, 2023, Judge Analisa Torres rejected the US SEC’s motion to appeal its loss against Ripple Labs. The judge claimed that the regulator failed to show that there were controlling questions of law or that there were substantial grounds for differences of opinion on the matter.

“The SEC’s motion for certification of interlocutory appeal is denied, and the SEC’s request for a stay is denied as moot.”

It is worth noting that the decision isn’t a complete loss for the SEC. The judge set an April 2024 trial date for other issues that still need resolution. The agency may still try to appeal the overall case after.

SEC served another L in the Ripple case.

They can’t appeal the decision until after a trial on remaining issues. pic.twitter.com/t4rbAME1Cv

— Bill Hughes : wchughes.eth 🦊 (@BillHughesDC) October 3, 2023

SEC vs. Ripple Case Nears End with Conclusion of Discovery Phase

On February 20, the discovery phase in the high-profile legal battle between Ripple and the SEC concluded. 

With the end of the discovery phase, the focus now shifts to several critical dates that are fast approaching:

• March 13: The SEC is scheduled to file a brief related to remedies, outlining potential sanctions or remedies against Ripple for its institutional sales of XRP.
• April 12: The deadline for motions opposing the remedies proposals, where Ripple can present its counterarguments.
• April 29: The final deadline for remedies, after which the court, presided over by Judge Analisa Torres, will determine the penalties for Ripple’s actions.

A final verdict may not be expected until July or August, yet there remains a possibility for the case to conclude sooner should a settlement be reached.

It is worth noting that the SEC’s lawsuit against Ripple is emblematic of the broader tension between innovation in the digital asset space and regulatory efforts to ensure oversight. 

The case underscores the need for clear and consistent legal frameworks that can reconcile the need for protection with the imperative for progress within the rapidly evolving cryptocurrency landscape. 

The Bottom Line

While there are numerous legal battles moving forward, the cryptocurrency community is especially focused on the developments of the SEC vs. Ripple case. 

With the discovery phase now concluded and key deadlines on the horizon, the next few months are poised to be critical for both Ripple and the broader crypto industry, potentially setting precedents that could influence regulatory approaches and market dynamics for years to come.