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Ripple Defense Strengthening as Lawsuit with SEC Drudges Along

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For two years, the US Securities and Exchange Commission (SEC) has been in a legal brawl with Ripple Labs. On December 22, 2020, the SEC filed a lawsuit, in a federal district court in Manhattan, against Ripple Labs for raising funds totalling about $1.4 billion using XRP as a digital asset in a 2013 Initial Public Offering (IPO). The lawsuit alleged that Chris Larsen, Ripple Labs co-founder, and Brad Garlinghouse, Ripple’s current CEO, also made personal unregistered sales of XRP totalling around $600 million. The SEC charged the defendants with violating the registration provisions of the Securities Act of 1993. The SEC cited the Howey Test – a US Supreme Court case for determining whether a transaction qualifies as an investment contract and therefore would be considered a security subject to registration under the Securities Act of 1933 – to prove Ripple’s violation of the Securities Act.

The SEC also alleged that XRP is an unregistered security because since 2013 the only utility for XRP has been as an investment contract. The litigation led to the delisting of XRP on Coinbase and other exchanges – mainly US-based exchanges.

Following the lawsuit, Ripple, however, went all the way with the SEC into a legal brawl instead of opting to negotiate a settlement. The main bone of contention in the litigation has been, is XRP a security? In the latest update, crypto law experts who spoke with Forbes relayed key facts about the case, discredited the Howey Test, and suggested that the SEC is likely to lose the case.

Ripple Vs. SEC, The Legal Timeline

The case has taken a few turns over the past two years. Ripple has presented a series of arguments that have made it difficult for the SEC to have an easy win in the litigation; as a matter of fact, Ripple’s arguments have brought some twists into the case by which Ripple has been regarded by proponents as the favored party likely to win the litigation.

Ripple’s first argument in the early days of the legal brawl was that it never received any warning or fair notice from the SEC regarding XRP being a security. The SEC filed a motion to strike Ripple’s fair notice defense claiming the defense was legally insufficient and would lead the defendant to seek “intrusive discovery”; the court ruled against the motion.

What is the SEC Concealing?

Ripple’s following argument in court was based on a speech made by William Hinman, the then director of Corporation Finance at the SEC, at the 2018 Yahoo Finance All Markets Summit. Hinman declared that despite Ethereum’s 2014 initial Coin Offering (ICO), ETH is not considered a security by the SEC. In court, the SEC disclaimed Hinman’s declaration and argued that Hinman’s speech was his personal opinion and did not represent that of the SEC. However, Hinman was a member of the SEC leadership around the time the SEC filed the lawsuit against Ripple. In defense, Ripple demanded that the SEC also release the emails, memos and other documents to give a better view of how the SEC viewed cryptocurrencies and digital assets internally; the SEC rejected the demand and filed an appeal to a judge's order to comply with Ripple's demand.

Very recently, Ripple obtained the long-sought Hinman documents. Stuart Alderoty, Ripple’s general counsel, tweeted in celebration over the collection of Hinman’s documents. In his celebratory tweet, Alderoty said it was worth the fight to get hold of the documents.

Following the news that Ripple was now in possession of the Hinman documents, positive momentum has been building for XRP. The XRP community, popularly known as the XRPArmy on Crypto Twitter have had some XRP-related hashtag trends. One of the trending hashtags has been #relistXRP. The hashtag has been a call for crypto exchanges – especially Coinbase – who delisted XRP because of the SEC litigation to consider relisting the cryptocurrency. The XRPArmy seems confident that the final ruling will go in Ripple’s favor as one vital “weapon” in Ripple’s legal arsenal has been obtained.

Support For Ripple

The XRPArmy support for Ripple has been unwavering for the past two years. A group of XRP holders once showed an interest in participating in the court proceedings and aiding Ripple by providing information in court. The SEC filed an objection against the move.

Some firms that use Ripple’s suite of products have also shown interest in supporting Ripple in court proceedings. In early October, I-Remit, a payment provider, and TapJet, a private charter jet company, were granted permission by a US District Judge to file amicus briefs in favor of Ripple in the ongoing case. The SEC once again objected and asked the court not to grant permission. The SEC criticized the movers of the motion for seeking materials beyond the scope of discovery limitations. I-Remit and TapJet use XRP and the XRP ledger in their business operations.

Despite the SEC’s objection to third-party support for Ripple in court, the general support for Ripple in the crypto community has not waned. In a very recent show of solidarity, the crypto lobbyist group Blockchain Association has filed for permission to support Ripple as a friend of the court in the ongoing SEC legal brawl. Blockchain Association, in a released announcement, on its website said that the SEC-Ripple case is just one in a long line of SEC efforts to legitimize its overly broad interpretation of the Howey Test.

What to Expect if Either Party Wins The Lawsuit

The SEC-Ripple case has been seen as the case that could make or break the crypto space. On the one hand, a Ripple win in the lawsuit will most likely cause a huge XRP price rally; even if an immediate price outbreak does not occur, there will likely be steady small spikes for months as confidence in Ripple and XRP will be restored; XRP will also be relisted on US-based exchanges where it was previously delisted. A Ripple win will give the crypto community a clear definition of what types of coins and tokens can be regarded as securities. A Ripple win will be a humiliation for the SEC.

On the other hand, if the SEC wins the case, it will spell trouble for many other crypto projects and exchanges. The SEC will likely clamp down on other crypto projects that it deems it could bring under its laws. The general sentiment in the crypto community will not be a positive one.

The SEC-Ripple case is expected to carry on into 2023. Ripple’s CEO Brad Garlinghouse has said that he expects an answer in the SEC suit by the first half of 2023.

Mandela has been a cryptocurrency enthusiast since 2017. He loves coding and writing about emerging technologies. He has an in-depth understanding of distributed ledger technology and the Web3 technology stack. He enjoys researching new cryptocurrency projects.