SEC vs. The Ripple ruling could come at a crucial time for the crypto industry

As commuters rush through the arrivals hall at Washington DC’s iconic Union Station, they are greeted with a phalanx of fast food restaurants, coffee vendors and the occasional shop. About 100,000 people pass through each day, many of them Wall Street types, taking Amtrak from New York City to conduct public business. Others are local commuters scrambling to work from the DC suburbs and, of course, tourists visiting the nation’s capital.

Amidst the chaos looms a large blue billboard with bold white letters bearing the words “Crypto Means Business.” Below is the name of the billboard’s sponsor: “Ripple”.

Travelers disconnected from the crypto industry probably see the signage as just another corporate advertisement at a train station. Most people 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 US Securities and Exchange Commission (SEC) is seen in Washington, DC, January 28, 2021. – An epic battle unfolds on Wall Street, with a host of characters clashing over the fate of GameStop, a struggling chain. video g ((Photo by SAUL LOEB/AFP via Getty Images) / Getty Images)

They also don’t know that the ad’s placement in Union Station is actually quite symbolic. It’s on the exact route that commuting securities lawyers and bankers take on their way to the headquarters of Wall Street’s top cop, the US Securities and Exchange Commission, whose lobby is down the hall.

For nearly two years, the SEC has been locked in a high-profile lawsuit with Ripple, and the outcome could determine the scope of crypto enforcement proposed by SEC Chairman Gary Gensler. The advertisement in Union Station is not only a way for the company to present its product – it is also a message from Ripple to the SEC that it is not backing down.

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

Gensler, who became SEC chief in 2021, has aggressively pursued the civil lawsuit. People close to him say he hopes a legal victory will cement his status as crypto’s chief regulator. More importantly for Gensler, it could give him carte blanche to declare just about all digital coins, except perhaps bitcoin, unregistered securities as he tries to reign in what he believes is widespread abuse and corruption in the $1 trillion industry.

The Securities and Exchange Commission is studying ways to make it more possible 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 has dragged on through federal courts, the crypto business has been left in a regulatory vacuum. Is the SEC or the Commodity Futures Trading Commission, the regulator of futures contracts and currencies, its primary regulator? Are digital assets securities, commodities, currencies or something else entirely?

This legal dilemma is coming to an end soon. According to lawyers working on the case, Manhattan federal district judge Judge Analisa Torres could make a key ruling in the coming days on so-called summary judgment, which could hand either Ripple or the SEC a win. The judge could also order the case to go to trial, which could delay the industry’s much-needed regulatory clarity for months, perhaps years.

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

In recent months, Judge Torres has sided with Ripple in various motions, including requests for emails and other documents from SEC officials to show that the agency may have unfairly targeted Ripple. These documents were also designed to show how the SEC failed to give Ripple what is known as “fair notice” that the sale of XRP was illegal since the SEC brought the case well after the company began issuing tokens.

Many observers believed the judge was inclined to side with Ripple, given her fair-minded interpretation of the law and criticism of some of the litigation tactics used by SEC lawyers. Now they are not so sure. With the implosion of the algorithmic blockchain platform Terra in May, and the collapse of the FTX crypto exchange in November, and the indictment of founder Sam Bankman-Fried on fraud charges, many in the crypto industry say an outright victory for Ripple could be difficult. . The collapse of the two biggest crypto-friendly banks, Silvergate and Signature, could also have an impact on the bottom line.

“On the core legal issue of whether Ripple offered unregistered securities to the public, I think the SEC has the strongest case,” said Marc Fagel, former regional director of the SEC’s San Francisco office. “The matter is complicated by the question of whether Ripple had ‘fair notice’ that XRP was a security. Even there, I don’t see a convincing argument under legal precedent, although missteps by the SEC along the way have brought it to the fore.”

Among the many reasons why the result is important: to date there has been no formal classification of digital assets. Crypto’s legal status is therefore open to interpretation by the SEC and CFTC, resulting in a turf war of sorts in Washington over who should regulate the asset class. It will also determine whether the SEC’s current securities classification test should apply to digital assets. Known as the Howey test, which resulted from a 1946 Supreme Court decision, it determines what qualifies as an investment contract, and is therefore subject to US securities laws.

FILE PHOTO: Representations of cryptocurrencies Bitcoin, Ethereum and DogeCoin are placed on the PC 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, relied on Ripple’s efforts to boost profits. If the judge sides with the SEC, it could mean that many other digital coins are fair game to be classified as unregistered securities.

While Ripple has not denied that the sale of XRP occurred, the cryptocurrency company claims that it does not satisfy the Howey test because there was never an investment contract between Ripple and buyers of the XRP token.

“Our point is that Ripple doesn’t 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,” Ripple CEO Brad Garlinghouse said in an interview with FOX Business ‘ The Claman Countdown in September.

The issue surrounding the secondary market sale of XRP, meaning the sale of the token to retail investors on exchanges, has 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, effectively leaving their accounts in limbo.

Total losses for small investors and project developers using the XRP Ledger were said to amount to $15 billion. After the SEC filed the case, XRP dropped 70% in just a few days. Today it is trading at $0.46 after reaching a high of $3.84 in 2018.

It sparked outrage among retail investors and resulted in the appointment of Rhode Island-based attorney John Deaton as amicus curiae (“friend of the court”) representing the interests of XRP holders harmed by the lawsuit.

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

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