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The lawsuit brought by the US Securities and Exchange Commission (SEC) against Ripple Labs, the company behind Ripple (XRP), has proven to be one of the most important regulatory battles in the history of cryptocurrency.
In 2020, the SEC filed a lawsuit against Ripple Labs, alleging that it conducted an unregistered securities offering through the sale of its XRP tokens worth $1.3 billion.
The lawsuit argued that XRP should be classified as a security, similar to stocks or bonds, and therefore would be subject to SEC regulation.
However, US District Judge Analisa Torres ruled partially in favor of Ripple on July 13, 2023, and in September, lawyers representing Ripple argued the SEC had not met the requirements to request an appeal.
Now, with the “remedies-related discovery phase” in the case between Ripple and the SEC concluding on February 20, 2024, there are a few key deadlines left on the horizon.
Key Takeaways
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Did Ripple (XRP) or the SEC Win the Lawsuit?
The SEC v. Ripple lawsuit is important for crypto as it could provide clarity regarding the regulatory status of cryptocurrencies and how they are classified by the SEC.
But the July 2023 ruling, issued by the District Court for the Southern District of New York, offered a partial victory for XRP, stating that the “offer and sale of XRP on digital asset exchanges did not amount to offers and sales of investment contracts.”
The federal judge did rule that XRP is a security when sold to institutional investors, as it met the conditions set in the Howey Test.
In today’s summary judgment ruling, SEC vs Ripple:
"Ripple’s Institutional Sales of XRP constituted the unregistered offer and sale of investment contracts in violation of Section 5 of the Securities Act.” pic.twitter.com/qf4duETs3z
— Cory Klippsten 🦢 #Bitcoin is moral tender (@coryklippsten) July 13, 2023
If the court had agreed with the SEC, it could have set a painful precedent for how other cryptocurrencies are treated, potentially leading to increased regulation and oversight in the industry.
This would impact not only Ripple and XRP but also other projects that have conducted initial coin offerings (ICOs) or token sales.
Instead, Ripple secured a partial win, setting a precedent that offered a positive impact not only on XRP but also on the broader crypto market.
Ripple’s Win Against SEC Could Challenge SEC’s Jurisdiction Over Crypto
In general, the SEC has been excising regulatory pressure over the crypto industry amid increased calls for regulatory clarity in the sector.
Specifically, the commission has taken enforcement action against some major crypto exchanges like Kraken and Bittrex, as well as the crypto lending platform Nexo.
More recently, the SEC joined forces with other regulatory agencies and filed a complaint against the CEO of bankrupt crypto lender Celsius, Alex Mashinsky.
The court filing by the agency includes four counts of fraud and one count of securities violation. The complaint argues that Celsius (CEL) and its Earn product should be classified as securities.
However, the SEC’s most high-profile complaint came in August 2023 when the agency sued both Binance (and some of its affiliates), the world’s largest cryptocurrency exchange, and Coinbase, the largest US-based cryptocurrency exchange.
In each case, the SEC claimed that several tokens listed by the exchanges are unregistered securities, including dozens of popular cryptocurrencies like Binance’s native token BNB, Solana (SOL), Cardano (ADA), Polygon (MATIC), Filecoin (FIL), Cosmos (ATOM), Sandbox (SAND), Decentraland (MANA), Algorand (ALGO), Axie Infinity (AXS), and Coti (COTI).
Following the ruling in the SEC Ripple lawsuit, many of these tokens may no longer be considered securities under the new precedent — however, each token’s case may still need to be clarified in court, leaving uncertainty in the air.
“This is a significant opinion that has the potential to change the landscape of the SEC’s enforcement efforts or the success of those efforts,” said Teresa Goody Guillén at the time, a former attorney with the SEC office of the general counsel, and now a partner with law firm BakerHostetler.
“This is also helpful precedent for Coinbase and Binance to defend against allegations that they are operating as unregistered securities exchanges, brokers and clearing agencies.”
Several other legal experts further noted that the federal judge’s ruling may have essentially declared token sales on retail exchanges weren’t investment contracts under the law (and thus, the tokens are not securities) even though XRP coins sold to institutions such as hedge funds and the like were deemed securities.
“The court rejects the view that cryptocurrency tokens are securities, which has previously led to widespread confusion,” Jeffrey Alberts of Pryor Cashman LLP reportedly said, adding that the judge had clarified in her ruling that crypto tokens are not themselves securities.
Ripple Has Yet to Celebrate its Win Against the SEC
While many crypto pundits rejoiced about Ripple’s recent partial win, others noted that the industry’s fight for regulatory clarity is far from over.
Preston Byrne, partner at Brown Rudnick and a crypto entrepreneur, said the SEC is currently reviewing the decision, claiming that the agency might challenge the ruling.
“The Ripple summary judgment is obviously not the last word on the issue,” Byrne said in a recent tweet, noting that even if Ripple accepts the win, the firm still “got multi-billions of dollars in institutional sales that they’re on the hook for.”
At the end of the day, actual "token common law" in the United States is still pretty sparse, mainly consisting of a handful of District Court-level decisions of limited precedential value…
— Preston Byrne (@prestonjbyrne) July 13, 2023
Others also claimed that the summary judgment may not have a strong foundation and may not result in the desired change in how the SEC treats the crypto industry.
Joe Castelluccio, leader of law firm Mayer Brown’s Fintech group, said that the SEC will likely highlight the parts of the court decision that support their views on coins and tokens as securities. Castelluccio also emphasized that the case does not clarify the various other regulatory issues faced by the digital assets sector.
As expected, on August 9, 2023, the SEC announced intentions to file an “interlocutory appeal” of the ruling. In a court filing, the regulator said an appeal could address legal issues on which there was “substantial ground for differences of opinion.”
“Specifically, the SEC seeks to certify the Court’s holding that Defendants’ ‘Programmatic’ offers and sales to XRP buyers over crypto asset trading platforms and Ripple’s ‘Other Distributions’ in exchange for labor and services did not involve the offer or sale of securities under [the Howey test],” the filing read.
However, in the latest XRP lawsuit news, lawyers representing Ripple have argued that the SEC hasn’t met the requirements to request an appeal.
In a September 1 filing, they claimed that the SEC’s grounds for an appeal largely rested on “dissatisfaction” with a judge’s decision that the XRP token did not qualify as a security for sales to retail investors.
The lawyers said “exceptional circumstances required for interlocutory appeal” were absent in the case and called on the judge to deny any request for an appeal or stay.
“The SEC has not even attempted to meet the standard for a stay, even after the Individual Defendants identified that omission in their pre-motion letter.”
As of late, there have also been rumors about a settlement between Ripple and the SEC. In a recent tweet, pro-XRP lawyer John Deaton said that if the judge in the Coinbase case grants the exchange’s motion to dismiss, it would indicate that token sales on the exchange are not subject to securities laws.
He claimed that if Coinbase’s motion to dismiss the lawsuit is approved, the SEC’s ability to pursue an appeal would be considerably constrained, making a settlement a logical option.
The only way @Ripple and the @SECGov settle before the end of the year is if Judge Failla grants the @coinbase MTD (or partially grants it – finding token sales on an exchange in a blind bid/ask transaction do not fall under U.S. securities laws but allows the staking component… https://t.co/0KzGT1l0OI
— John E Deaton (@JohnEDeaton1) September 2, 2023
Judge Rejected Motion to Appeal to its Loss
The SEC faced another loss in its lawsuit against Ripple Labs in October 2023 after Judge Analisa Torres rejected its motion to appeal its loss against the company. Tthe 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 order said that the commission had sought permission to appeal Torres’ findings about “programmatic” sales of XRP and about “other distributions” of XRP as a means of payment for services, saying an appeal would be important to a “large number” of lawsuits.
However, the judge found no “substantial ground for difference of opinion” about her findings and did not agree that an appeal would materially advance the case toward a conclusion. “The SEC’s motion for certification of interlocutory appeal is denied,” the order read.
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.
Ripple vs. SCE Discovery Phase Concluded
On February 20, the Ripple and SEC discovery phase concluded, leaving a few key deadlines on the horizon, which has fueled speculation of an early resolution, potentially benefiting both parties.
The discovery phase is the stage in a lawsuit where both parties gather and exchange information and evidence relevant to their respective cases.
This process enables the two sides to build strong arguments, understand the other party’s claims, and, in some instances, reach a settlement without the need for a trial.
With this chapter closed, attention has shifted to these upcoming dates:
- March 13: The SEC must file its remedies-related brief by this date.
- April 12: Ripple must file any motions in opposition to the SEC.
- April 29: The final deadline for any remediee, and the court will determine any penalties for Ripple’s institutional sales.
While a final verdict from Judge Analisa Torres might not come until July or August, a settlement could conclude the case even sooner.
A Settlement Between SEC and Ripple “Improbable”
In a recent post on X, lawyer Bill Morgan claimed that a settlement between Ripple and the SEC is improbable at the moment.
Morgan’s analysis centers around Kraken referencing the Ripple case, particularly citing Judge Torres’s decision on programmatic sales of XRP.
“The manner in which Kraken uses the finding of Judge Torres on programmatic sales in the summary judgment decision in its own motion to dismiss shows why the SEC will be strongly motivated to appeal Judge Torres’ decision,” he wrote.
“It is why a settlement of the SEC v Ripple case seems so improbable at the moment.”
The manner in which Kraken uses the finding of Judge Torres on programmatic sales in the summary judgment decision in its own motion to dismiss shows why the SEC will be strongly motivated to appeal Judge Torres’ decision. It is why a settlement of the SEC v Ripple case seems so… https://t.co/n1uYaOlh1d
— bill morgan (@Belisarius2020) February 23, 2024
While there are no signs of negotiations, a settlement could offer both parties a clear resolution, avoiding further legal costs and uncertainties.
The Bottom Line
The SEC lawsuit against Ripple underscores the ongoing tension between innovation in the digital asset space and regulatory efforts to oversee it, highlighting the need for clear, consistent legal frameworks that balance protection with progress.
With the discovery phase concluding on February 20, the industry awaits the final outcome of this year-long case. While a final verdict from Judge Analisa Torres might not come until July or August, a settlement could conclude the case even sooner.
