How Ripple plans to defend SEC charges over XRP token
Less than a month ago, XRP was the No. 3 cryptocurrency by market capitalization, just behind Bitcoin (BTC) and Ether (ETH). This week, XRP dropped to number five on some crypto exchanges. Its price has fallen 52% since December 22nd when the SEC opened banking software company Ripple Labs in 2013 with an unregistered security offering of $ 1.3 billion .USD when it started selling XRP. The indictment also names two Ripple executives, co-founder and former CEO Christian Larsen and current CEO Brad Garlinghouse, who allegedly sold personal XRP holdings worth $ 600 million.
The central problem in the case: is XRP a security?
The SEC believes it is, and says Ripple promoted XRP to fund its business.
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Ripple sells software products to banks and money transfer companies, some of which use XRP to expedite transfers and provide liquidity. After the SEC charges, Ripple partners such as MoneyGram (MGI) and Tetragon distanced themselves from the company. Crypto exchanges such as Coinbase, Gemini, and OkCoin are ending trading support for XRP this month. Coinbase is now facing a lawsuit by a customer in St. Louis over trading fees charged by Coinbase on XRP transactions.
READ MORE: Ripple CEO: 3 Reasons XRP Isn't Security
The charges against Ripple were announced the penultimate day in the office of outgoing SEC chairman Jay Clayton, leaving Ripple in limbo. The SEC interim chairman is Elad Roisman; Joe Biden's choice for the new SEC chairmanship is former CFTC chairman Gary Gensler, who looks crypto-friendly.
During the transition, the SEC's cyber division is continuing the case against Ripple, and the next event is a pre-conference scheduled for February 22nd in New York. Given the Ice Age pace at which the courts are moving, as well as the ongoing COVID-19 pandemic, an actual trial is unlikely to happen until spring or later - when it comes to that.
Dan Roberts and Andy Serwer of Yahoo Finance interviewed Brad Garlinghouse, CEO of Ripple, at the Yahoo Finance All Markets Summit: Crypto on February 7, 2018 in New York City. (Eugene Gologursky / Getty Images for Yahoo Finance / Oath)
SEC against the ICO boom
In all of its enforcement actions against startups that created tokens, the SEC relied on the "Howey Test," taken from a 1946 case (SEC v Howey) in which shares in a lemon grove were sold.
The test found, as former SEC official Bill Hinman stated at a Yahoo Finance crypto summit in 2018, that an offer is collateral if it "involves investing money in a joint venture with the expectation of a profit, that results from the efforts of others. "According to the SEC, most of the initial coin offerings during the infamous ICO boom were security offers, as the coins were marketed with the expectation that the price would go up and, as Hinman said," were sold to a large audience rather than individuals who are probably using it on the network. "
When it comes to XRP, Ripple is very different.
In his response to the SEC, Ripple wrote, "The SEC's theory that XRP is an investment contract is false as to the facts" and "means an unprecedented and ill-conceived extension of the Howey Test and the SEC's enforcement agency against digital media . " Financial assets."
Several SEC officials have made it clear in recent years that the SEC does not consider Bitcoin or Ether as securities. Garlinghouse, CEO of Ripple, has set out in the past why XRP is not a security and tries to prevent this very action by the SEC. it didn't work In a memo to Ripple employees, he called the SEC's action "an attack on crypto in the US". (Japan's securities regulators don't see XRP as collateral, and Garlinghouse recently threatened to move the company to Japan or Singapore.)
"XRP is a currency," says Ripple in his SEC letter, "similar to Bitcoin and Ether, which the SEC has determined are not securities."
It's interesting to refer to XRP as a currency considering that Garlinghouse said at a 2018 Yahoo Finance crypto summit, "I don't call this cryptocurrency. It's not a currency ... These are digital assets. If the asset is one solves real problem for a real customer, the asset is valuable. "
In one test scenario, one of Ripple's main arguments will be based on eight years of pricing data, which shows that, according to sources familiar with the company's legal strategy, XRP is not moving based on news about Ripple.
A specific example: When Moneygram announced on June 19, 2019 that Ripple had been named its exclusive partner for cross-border payment processing, MoneyGram shares rose 170% in one day. Ripple is displaying data showing that XRP has stayed flat. (Conversely, CoinMarketCap data shows that XRP rose 15% in the following two days.)
READ MORE: Former CFTC Chairman Says XRP Is Not Security - But Ripple Is His Client
The SEC's actions against Ripple are largely similar to actions taken against dozens of companies that have conducted ICOs, including Airfox, Paragon, Telegram, and Kik.
Ripple will try to distance itself from the ICO boom, many of which were carried out by companies that had no product or business model beyond selling a token, by emphasizing that Ripple Labs existed as a company for years before XRP was founded that XRP has a healthy trading market on hundreds of crypto exchanges with no affiliation to the company.
In this photo illustration, a visual representation of the digital cryptocurrency ripple (XRP) on January 3, 2021 in Katwijk, the Netherlands, is arranged on a circuit board of a hard drive. (Photo by Yuriko Nakao / Getty Images)
Regarding XRP's proprietary sales, Ripple will argue that those sales were only a fraction of the total XRP trade and that XRP buyers did not, as its own XRP sales were blindly made through exchanges and market makers I know that they bought it from Ripple, and so it couldn't be an investment contract.
But what if the SEC states that XRP is publicly so closely affiliated with Ripple that anyone who buys XRP sees it as a bet on the company's success?
Ripple Labs registered the trademark for XRP in 2013, and even referred to the token as "Ripples" for years (which the SEC specifically cites in its complaint), though it eventually stopped calling it that and began soliciting the media for it not to be called that.
Ripple's legal team believe the story of what Ripple called the token is a red herring, according to sources. The company also believes it's unfair that the SEC filed its enforcement suit at the very end of an outgoing administration.
Ultimately, this section of the SEC's complaint against Ripple could prove crucial: “The Supreme Court, in its Howey ruling of 1946, made it clear that the definition of whether an instrument is an investment contract, and therefore a security, is more flexible than static Principle is one that can adapt to the myriad and variable systems developed by those who wish to use others' money to promise profits. “The SEC's complaint mentions this twice: that it can apply Howey's definition of a security flexibly.
The SEC believes that XRP fails its "flexible" test. Ripple Labs has to prove otherwise, for the health of its business and for the XRP market - even if Ripple says the market has no connection to its business.
Daniel Roberts is Editor-in-Chief at Yahoo Finance and has been working with Bitcoin since 2011. Follow him on Twitter at @readDanwrite.
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