Where Are We & How Did We Get Here?

It all goes back to a few days before Christmas 2020 when the SEC filed a lawsuit accusing Ripple of violating the law and perpetrating an unregistered securities offering as, according to the SEC, Ripple labs sold the XRPL’s native token ‘XRP’ to investors as a securities contract.

Ripple executives Christian Larsen and Brad Garlinghouse were thus accused of allegedly raising $1.3bn from the sales of unregistered securities. The complaint filed by the SEC charged the defendants with “violating the registration provisions of the Securities act of 1933, and seeks injunctive relief, disgorgement with prejudgement interest, and civil penalties”. 

Back in 2020, the SEC built its legal argument around the premise that anyone purchasing XRP had automatically entered into an investment contract with Ripple Labs.

If that were the case, and XRP was to be ruled an investment contract (thus deemed a security), it would indeed be governed by US securities laws under the remit of the SEC.

Beyond the SEC’s allegations, which are yet to be ruled on, the SEC also asserted that Ripple and its management had lured investors into purchasing XRP having made them believe they stood to benefit from massive price increases – implying XRP, which serves as a Neutral Bridge Asset for cross border payments and decentralised cryptocurrency with millions of users was simply nothing more than an investment contract with Ripple.

However, if this weekend’s developments are any indication, the SEC may have opted to change course. 

Many Questions With Too Few Answers

Our collective knowledge about cryptocurrencies and blockchain technology has grown rapidly over the past few years. In fact, one could argue that it was even more limited than it currently is two years ago, back in 2020. Although several commentators who find themselves on the fence about the length of this trial have pointed to this limited understanding of the technology as the reason why it has dragged on for so long, XRP and crypto enthusiasts are less convinced; with some even claiming the SEC has overstepped their legal jurisdiction.

Now, with the most recent shift in gears which can only be best described as backpedaling, the SEC’s fundamental argument seems to be on shaky ground. With the case dragging on for as long as it has, people on both sides of the debate are wondering if this is/has been the best allocation of resources in times of financial and geopolitical uncertainty. Are the government’s funds and resources really being spent to serve the best interests of the public? After all, the SEC’s primary remit is to protect investors.

Fast forward to last week, on the 14^th of September, where the lawsuit entered a critical stage after both parties filed motions for a summary judgment. This weekend, in a surprising move that came earlier than the scheduled date of September 19th, both Ripple and the Securities and Exchange Commission independently filed the motions in a move that inspired a lot of backlashes.

What Is A Summary Judgement & Why Did Both Parties File For One?

According to U.S. Law, summary judgment is “appropriate when the record shows that there is no genuine dispute as to any material fact”. 

So why did both Ripple and the SEC call for an immediate ruling in the ongoing lawsuit to ascertain if XRP sales violated securities laws? Well, there really aren’t that many factual issues that are disputed in the case. If a Ripple employee tweeted or said something in an interview, that fact is not disputed, the only disagreement is about the meaning and implications of said statements. 

This brings us to the surprising development which many have claimed as a victory for Ripple. Nowhere in this weekend’s motion by the SEC did they explicitly claim that XRP is inherently a security. In fact, the motion is focused almost exclusively on sales & marketing efforts by Ripple employees, indicating their belief that these efforts alone are what makes Ripple’s actions the focus of legal scrutiny. 

To reiterate, the SEC’s shift in focus from XRP being an unregistered securities contract to Ripple employees’ statements possibly being inappropriate are why many critics are now claiming the SEC finds itself on shaky ground and is therefore looking for new angles to attack Ripple from. 

Why Was The Year 1933 Mentioned & What is Howey Test?

Many who bothered to read the actual filings were left puzzled about why Ripple’s legal team made multiple references to the year 1933 while the SEC almost entirely omitted it. The 1933 securities act was in fact written into law to protect investors while preventing “deceit, misrepresentation, and other fraud in the sale of securities”.   

To decide what is a security and what is not, the SEC later devised the Howey Test. This following set of questions must all be true for the asset in question to legally be considered a security.

The Howey Test comes from case law created in SEC v. W.J. Howey Co (1946). the “Howey test” exists to ascertain if the object in question:

1. Is an investment of money,
2. Has an expectation of profits from the investment,
3. Is an investment of money in a common enterprise,
4. Has or has not secured profit from the direct efforts of a promoter or third party.

But, Is XRP A Security?

Only if an asset indeed ticks all of the above boxes it is then classified as a security and is regulated as such in the United States. Such a ruling could have significant impacts on the asset, especially in the case of cryptocurrencies or other digital assets.

Currently, however, based on the legal application of the Howey test it can only be concluded that XRP is not a security. And although some have stated that the Howey test is outdated, there simply is no other way to ascertain, in the eyes of the law, if an asset is a security or not.

Furthermore, in 2018, the SEC chairman stated that the agency would not change the definition of what security is based on the growing cryptocurrency market. The lack of clear guidelines regarding crypto regulation has led many to question what exactly the SEC wants blockchain innovators to do. By depriving the blockchain-verse of guidance, those who attempt to self-regulate and follow best practices with good intent are finding themselves in trouble with the regulator.

Ripple has put forward this very point within its lawsuit. The Fair Notice Defence (FND) argues the lack thereof clear guidelines itself has prevented Ripple from possibly doing certain things differently as the SEC and broader government laws simply do not exist. However, according to SEC chair Gensler the rules are “Very clear”.

What The People Think

The global XRPL community has been following the case closely and is eagerly awaiting each official update just as much as the unofficial, more opinionated commentary flooding various social media platforms.

If the SEC is ruled to be correct, according to Brad Garlinghouse, Ripple would most likely have to move their operations to another country, potentially the UK, Japan, or Singapore. Given the vast sums of corporate tax paid by Ripple in the US, Garlinghouse doesn’t think driving the company out of the country would best serve the US agenda or the American taxpayers.

If, however, the SEC’s allegations are found to be erroneous by the court, as many suspect, meaning Ripple did NOT offer XRP to investors as an unregistered securities contract, public trust in the SEC under Gary Gensler’s leadership could be further eroded. The overwhelming feeling amongst the XRPL community and XRP hodlers is that SEC has dragged this out.

To Summarise

By choosing to not focus on XRP being a security, the SEC essentially removes “the nightmare scenario” from the likely outcomes of this hearing. The nightmare scenario, as many XRP proponents have come to call it, refers to a situation where the SEC determines XRP to be a security itself, meaning the tokens essentially become a legal quagmire of digital code. 

Essentially, all the SEC have done in this brief is to take apart the hundreds of sales & marketing statements made by Ripple over the past years, before reorganising them to paint Ripple’s actions in a particular frame. By shifting the focus from the core question of whether or not XRP is a security, many believe the SEC’s most recent filing for a summary judgment is a step towards preparation to accept defeat in the case. If so, the cryptosphere certainly has a reason to celebrate or at least breathe a sigh of relief.