XRP was the third-largest cryptocurrency by market capitalization less than a month ago, trailing only bitcoin (BTC) and ether (ETH).
On certain crypto exchanges, XRP has dropped to No. 5 this week. SEC accused Ripple Labs, a financial software business, on Dec. 22 of conducting a $1.3 billion unregistered securities offering in 2013 when it began trading XRP.
The allegations also accuse two Ripple officials, Christian Larsen, co-founder and former CEO, and Brad Garlinghouse, current CEO, of selling $600 million worth of personal XRP assets.
How Safe is XRP?
The SEC believes it is, and claims Ripple touted XRP as a way to fund its operations.
Ripple supplies software to banks and money-transfer businesses. Some of them use XRP to speed up remittances and provide liquidity.
MoneyGram (MGI) and Tetragon, both Ripple partners, have distanced themselves from the company as a result of the SEC allegations. This month, Coinbase, Kraken, eToro, and OkCoin, among other US crypto exchanges, are halting XRP trading service. A user in St. Louis has filed a lawsuit against Coinbase for trading fees earned on XRP transactions.
The problem of the SEC’s approach, as CoinList general counsel Carla Carriveau points out, is that ordinary investors—the exact people the SEC is trying to protect—will be unable to sell their XRP. This is why, on January 1, a group of XRP holders filed a petition with the SEC temporary chairman Elad Roisman. They request that the SEC’s lawsuit against Ripple have amendments to specify that their existing XRP holdings do not deem securities.
Ripple is in limbo after the announcements of allegations against outgoing SEC Chairman Jay Clayton’s penultimate day in office. Roisman is the SEC’s interim chairman. President-elect Joe Biden’s nominee for SEC chairman is Gary Gensler, the former chairman of the Commodity Futures Trading Commission. He appears to be pro-crypto.
During the transition, the SEC’s cyber branch is continuing its investigation into Ripple. It has a pretrial meeting scheduled for February 22 in New York. Given the slow speed of the courts and the current COVID-19 outbreak, a trial is unlikely to take place until spring or later. If it even gets that far.
The SEC has used the “Howey Test” in all of its enforcement proceedings against startups that generated tokens. This is based on a 1946 case (SEC v. Howey) regarding the sale of shares in a citrus plantation.
According to the test, an offering is a security if it demands an investment of money in a common company with the expectation of profit obtained from the labor of others. Former SEC official Bill Hinman noted at a Yahoo Finance crypto summit in 2018.
Most initial coin offerings during the infamous ICO boom, according to the SEC, were securities options since these coins marketed with the expectation that the price would rise. These were also sold to a broad audience rather than to people who are likely to use them on the network, as Hinman explained.
Ripple Begs to Differ when It Comes to XRP
Ripple noted in its response to the SEC that its premise that XRP is an investment contract is based on facts that are incorrect. It also amounts to an unusual and ill-advised expansion of the Howey test and the SEC’s digital asset enforcement authority.
Several SEC officials have said unambiguously that bitcoin and ether are not securities in recent years. Ripple CEO Garlinghouse has made the case in the past that XRP is not a security. Moreover, this was an attempt to prevent the SEC from taking this action; it hasn’t worked.
XRP is a currency, according to Ripple’s SEC letter. Bitcoin and ether, for example, have been declared by the SEC to not be securities.
Ripple referring to XRP as a currency is notable. Given that Garlinghouse stated at a 2018 Yahoo Finance crypto summit that he does not refer to XRP as a cryptocurrency. Furthermore, it isn’t a form of payment. This is a collection of digital assets. There will be value in the asset if it solves a real problem for a real customer.
According to insiders familiar with Ripple’s legal strategy, one of the company’s primary arguments in a trial scenario will be based on eight years of price data. Additionally, it proves XRP does not fluctuate based on news about Ripple.
Moneygram stock soared 170 percent in a single day when the company revealed it had appointed Ripple its exclusive partner for cross-border payment settlements on June 19, 2019. Ripple will disclose data showing that the price of XRP has remained unchanged.
The Flexible Requirement for XRP
The SEC’s case against Ripple resembles the SEC’s proceedings against hundreds of firms that held initial coin offerings (ICOs). This includes Airfox, Paragon, Telegram, and Kik.
Ripple will try to distinguish itself from the ICO boom. It saw many companies launch token sales with no product or business model other than selling a token, by pointing out that Ripple Labs existed for years before the creation of XRP, and that XRP has a healthy trading market on hundreds of crypto exchanges without any ties to the company.
Ripple will argue that its own XRP sales accounted for a tiny fraction of all XRP trading. Also, because its own XRP sales were done on a blind basis through exchanges and market makers, purchasers of XRP had no idea they were buying it from Ripple, and thus it couldn’t be considered an investment contract.
XRP, according to the SEC, fails the “flexible” requirement. Ripple Labs will have to prove differently for the sake of its business and the XRP market. Even if Ripple claims the market has no bearing on its operations.