SEC v. Ripple summed up
The world of blockchain technology is moving fast and Ripple Labs is in a top position to lead the finance industry to adopt distributed ledger to its processes, except for the lawsuit the firm is embroiled in.
The Securities and Exchange Commission has charged Ripple and its co-founders with an unregistered securities offering when it sold XRP since 2012.
Both parties are disputing two main points: whether XRP is in fact a security and if the SEC provided Ripple with propper fair notice that selling XRP would be deemed a securities offering.
In regard to XRP being a security or not, while nothing has been decided yet, the Judge did drop a bombshell back in March.
“My understanding about XRP is that not only does it have a currency value but it has a utility and that utility distinguishes it from Bitcoin and Ether.”
As for the fair notice argument, that is currently the most disputed issue in the lawsuit and is probably the one that could do the most damage to the SEC and its enforcement division for years.
If the judge rules that the financial watchdog failed to provide fair notice, that ruling can be used by future cryptocurrency firms that find themselves in similar lawsuits. Interestingly, the SEC used that as a fear-mongering tactic to ask the court not to give in to the fair notice defense.
Ripple, however, states that this lawsuit is anything but similar to the past enforcement actions brought forth by the regulator. One main point is that, unlike other firms who launched initial coin offerings to raise funds to build their blockchain products and services, Ripple already had XRP in place when it sold the digital asset.
This leads to the question: what is the SEC’s rationale regarding Bitcoin, Ethereum, and XRP? This has prompted Ripple Labs to ask the regulator to turn over its internal documents, which Judge Sarah Netburn approved.
The SEC, however, keeps on refusing to disclose that information despite the Judge’s insistence. Should the regulator remain uncooperative, the Judge could order monetary sanctions.
Earlier in June, the SEC asked for more time to investigate the case, which the defendants oppose as they contend they had sufficient time to investigate this matter before filing suit and because Ripple wants to move for summary judgment as soon as possible.
Ripple has recently stated that the SEC has not shown good cause to extend the discovery and an extension will unduly prejudice Ripple’s business.
And that is probably the regulator’s strategy: to threaten Ripple’s business as much as it can in order to obtain the best settlement deal possible. Ripple Labs is not like the other defendants. It is well funded and seems to have a case to claim the lawsuit is unprecedented, which could trigger a win on the fair notice defense.
That is likely to be the most feared outcome for the SEC. So, the regulator will do anything to avoid going there, namely stalling the case to hurt Ripple’s business.
The blockchain firm also wants to go public once the lawsuit is over. That can only happen if the lawsuit is really over, but a settlement could be costly for Ripple and for its digital asset as it may bottleneck the flow of XRP into the market for years.
In the likely event of a settlement, Ripple’s XRP could end up like Block.one’s EOS. The latter has recently settled a class action lawsuit after settling with the SEC in 2019. Block.one rolled over for the regulator and maybe it was for the best.
Should Ripple choose further litigation, the road could turn rockier and eventually result in a Telegram-like outcome. For now, the Judge has extended the SEC period to complete discovery.
The SEC now has until August 31 to conduct fast discovery, with expert discovery being pushed until October 15.