SEC verdict against Ripple could come at a pivotal time for the crypto industry

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As commuters rush into the arrivals hall of Washington DC’s iconic Union Station, they are greeted by a phalanx of fast food restaurants, coffee vendors and casual retail stores. About 100,000 people pass through it every day, many of them Wall Street types who take the Amtrak from New York to do business with the government. Others are local commuters scrambling for work from suburban DC and, of course, tourists visiting the nation’s capital.

Amidst the chaos stands a large blue billboard with bold white letters bearing the words “Crypto Means Business”. Below it reads the name of the billboard sponsor: “Ripple”.

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Travelers out of touch with the crypto industry likely view the signage as just another corporate advertisement at a train station. I probably don’t know that Ripple is one of the biggest names in the crypto industry, the provider of a cross-border payment solution that uses blockchain technology.

The headquarters of the United States Securities and Exchange Commission (SEC) is seen in Washington, DC, January 28, 2021. – An epic battle is unfolding on Wall Street, with a cast of characters competing over the fate of GameStop, a struggling g-video channel ((Photo by SAUL LOEB/AFP via Getty Images)/Getty Images)

They also don’t know that the placement of the ad in Union Station is, in fact, quite symbolic. It is located on the exact route that securities lawyers take to get to the headquarters of Wall Street’s main cop, the United States Securities and Exchange Commission, whose lobby is located just down the hall.

For nearly two years, the SEC has been locked in a high-profile lawsuit with Ripple and the outcome could dictate the scope of cryptography proposed by SEC Chairman Gary Gensler. The announcement in Union Station isn’t just a way for the company to tout its product — it’s also a clear message from Ripple to the SEC that it isn’t backing down.

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As FOX Business previously reported, the SEC in 2020 filed charges alleging Ripple and its executives violated securities laws by selling the digital token XRP to fund its business. The SEC argues that Ripple should have registered XRP as security. Ripple says XRP is not a security, so the sales were completely legal.

Gensler, who became SEC chief in 2021, has aggressively pursued civil litigation. People close to him say he hopes a legal victory will cement his status as chief crypto regulator. More importantly for Gensler, it could give him carte blanche to declare just about any digital coin, with the possible exception of bitcoin, an unregistered security as he seeks to rule what he sees as rampant abuse and corruption in the $1 trillion industry.

The Securities and Exchange Commission is exploring ways to make it easier for cryptocurrency trading platforms to register with the agency as exchanges, Chairman Gary Gensler said Monday, April 4, 2022 (Photo by Evelyn Hockstein- Pool/Getty Imag (Photo by Evelyn Hockstein- Pool/Getty Images/Getty Images)

As the case languished in federal courts, the crypto industry was left in a regulatory vacuum. Is the SEC or the Commodity Futures Trading Commission, the regulator of futures and currencies, its main regulator? Are digital assets securities, commodities, currencies, or something else entirely?

This legal dilemma will soon come to an end. According to attorneys working on the case, Manhattan Federal District Judge Analisa Torres could potentially issue a key ruling in the coming days on so-called summary judgment, which could hand Ripple or the SEC the win. The judge could also order the case to go to trial, which could delay much-needed regulatory clarity by months or even years.

The SEC did not respond to a request for comment. A Ripple spokesperson declined to comment.

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Over the past several months, Judge Torres has sided with Ripple on various requests, including his requests for emails and other documents from SEC officials in an attempt to show that the agency may have unfairly targeted Ripple. These documents were also designed to show how the SEC may have failed to give Ripple what is called “fair notice” that its XRP sales were illegal since the agency brought the case well after the company began issuing the tokens.

Until recently, observers thought the judge was inclined to side with Ripple, given what they saw as her fair interpretation of the law and criticism of some of the litigation tactics used by Ripple’s attorneys. the SEC. Now they are not so sure. With the May implosion of blockchain platform Terra, the November collapse of crypto exchange FTX, and the indictment of its founder Sam Bankman-Fried for fraud, many within the industry crypto say an outright win for Ripple could be tough. The collapse of the two biggest crypto-friendly banks, Silvergate and Signature, could also impact the end result.

“On the central legal issue of whether Ripple offered unregistered securities to the public, I think the SEC has the strongest argument,” said Marc Fagel, former regional director of the SEC’s San Francisco office. “The case is complicated by whether Ripple had a ‘fair view’ that XRP was a security. Even there, I see no compelling argument in the legal precedent, even if the SEC missteps along the way have brought him to the forefront.”

Among the many reasons the result matters: To date, there has been no formal classification of digital assets. Crypto’s legal status is therefore open to interpretation by the SEC and the CFTC, leading to something of a turf war over which regulator should regulate the asset class. It would also decide whether the SEC’s current test for securities classification should apply to digital assets. Known as the Howey test, which resulted from a 1946 Supreme Court ruling, it determines what constitutes an investment contract and is therefore subject to US securities laws.

FILE PHOTO: Representations of the cryptocurrencies Bitcoin, Ethereum and DogeCoin are placed on the PC’s motherboard in this illustration taken June 29, 2021. REUTERS/Dado Ruvic/File Photo

The SEC’s main argument is that Ripple broke the law by selling XRP as an investment contract to buyers who they say were counting on Ripple’s efforts to increase their profits. If the judge sides with the SEC, it could mean that many more digital coins will be in play to be classified as unregistered securities.

Although Ripple did not deny the XRP sales, the cryptocurrency company maintains that they do not pass the Howey test because there was never an investment contract between Ripple and the buyers of the token. XRP.

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“Our point is that Ripple does not have a contract. Who is the contract with? It’s not a written contract, it’s not an oral contract, it’s not an implied contract,” said the Ripple CEO Brad Garlinghouse in an interview with FOX. Business’ The Claman Countdown in September.

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The issue surrounding secondary market sales of XRP, i.e. sales of the token to retail investors on exchanges, made the matter particularly important to the crypto investing public. When the SEC sued Ripple in December 2020, exchanges like Coinbase and Crypto.com removed XRP from their platforms, so investors could no longer buy or sell the token, leaving their accounts in limbo.

The total losses suffered by small investors and project developers using the XRP Ledger would amount to around $15 billion. After the SEC filed the case, the price of XRP fell 70% in just a few days. Today it is trading at $0.46 after hitting a high of $3.84 in 2018.

The situation sparked outrage among retail investors and resulted in the appointment of Rhode Island-based attorney John Deaton as amicus curiae (“friend of the court”). Deaton currently represents the interests of 75,000 global XRP holders who were harmed by the lawsuit.

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In addition to Deaton, fifteen other industry players and organizations, including Coinbase and The Blockchain Association, submitted amicus briefs either on behalf of Ripple or on behalf of the broader crypto industry. By comparison, the SEC only received two amicus briefs to support its case against Ripple.

“This case could set a precedent that could impact not only the digital asset industry, but also capital markets,” said Perianne Boring, founder and CEO of the Chamber of Digital Commerce in a statement to FOX. Business. “Our preference is for industry players to have clear guidelines on how to operate rather than being regulated by application.”

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