By Raphael Sanis and Peter Henn
Edited by Charlie Mellor
The long-running court case between Ripple Labs and the US Securities and Exchange Commission (SEC), which could set a precedent for the whole cryptocurrency industry, could come to an end after the Ripple/SEC lawsuit entered its third calendar year.
In late March, the price of Ripple’s XRP surged by around 30% owing to reports that the case would soon be coming to a close. Lawyers for Ripple argued that a judge’s ruling against the SEC in a court case involving the Binance (BNB) crypto exchange, where the SEC argued unsuccessfully that Binance was an unregistered securities exchange, could have a positive impact in the ongoing hearing.
On 18 April, SEC Chair Gary Gensler refused to say whether or not XRP was a security.
On 20 March, lawyer John Deaton said he expected controversial comments by former SEC director Bill Hinman, seemingly suggesting that cryptocurrencies were not securities, would be made public because they also had an impact on other legal cases.
On 20 February 2023, Ripple’s Chief Legal Officer, Stuart Alderoty, said that he expected his company would, ultimately, be successful again the SEC’s claim that its XRP cryptocurrency was a security.
He tweeted: “The SEC has lost 4 of its last 5 cases in the Supreme Court, thanks to the few that had the courage and resources to fight back against the SEC’s bullying and clinging to stretch legal positions that were not faithful to the law.”
Alderoty’s comments come not that long after bosses at the tech firm expressed their confidence that the case, which is currently before Judge Analisa Torres of the United States Southern District Court of New York, would be decided relatively soon.
On 18 January, Ripple CEO Brad Garlinghouse told CNBC: “We’re optimistic that this will certainly be resolved in 2023, and maybe [in] the first half. So we’ll see how it plays out from here. But I feel very good about where we are relative to the law and the facts.”
Adding that he expected the final ruling in the Ripple lawsuit to be handed out “in the single digit months,” Garlinghouse said: “We have always said that we would love to settle, but it requires one very important thing, and that is that, on a go-forward basis, it’s clear that XRP is not a security.
“The SEC and Gary Gensler has very outwardly said he views almost all crypto as a security. And so that leaves very little space in the Venn diagram for settlement.”
Garlinghouse’s comments came as final motions in the XRP lawsuit were put to the court, with the final ruling expected at some point this year. Until then, the Ripple lawsuit outcome is up in the air.
There was speculation in December 2022 on Twitter that the case, which hangs on whether Ripple’s XRP token is an unlicensed security, could have been settled that month after an ask-me-anything with Cardano’s Charles Hoskinson. He said he had heard rumours XRP v SEC could be finalised around 15 December. However, Hoskinson later clarified he was relaying rumours and not anything more concrete, meaning that this piece of XRP lawsuit news ended up being mere speculation.
Apparently @IOHK_Charles believes Ripple will settle their case by the 15th of this month.
Brad did state that he wouldn’t settle unless there’s clarity.
Both the SEC and Ripple Labs, the company behind the ripple (XRP) cryptocurrency, had until 30 November 2022 to submit a reply in support of their summary judgment motions, which were made public on 2 December 2022.
Prior to this, the parties had filed their initial motions for summary judgment, published on 17 September 2022. Stu Alderoty, Ripple’s general counsel, told Capital.com: “The filings show that the SEC is acting outside their legal limits. The SEC is not looking to apply the law – they are looking to remake the law in the hopes that it can impermissibly expand their jurisdiction.”
Ripple was then handed a small win, as the judge hearing the case ordered the SEC to hand over the “Hinman documents”, which were exchanged on 20 October 2022. These mainly relate to a speech in which a previous SEC director said that ether (ETH) was not a security.
However, the SEC subsequently applied on 22 December 2022 to prevent the Hinman documents from being made public in the XRP lawsuit, including any references in court papers submitted by Ripple Labs.
There was some confusion on 14 November 2022 when Fox Business reported that a settlement had been reached in the Ripple/SEC lawsuit. One of its reporters later revealed that a Ripple spokesperson had denied these claims.
Meanwhile, a wave of organisations have come out in support of Ripple and submitted amicus curiae briefs to the court. A total of 16 different briefs have been submitted, with the industry leader Coinbase the latest to file its support. Crypto advocacy groups have also joined this list, including the Chamber of Digital Commerce and the Blockchain Association.
In reaction to the first glimpse of the Ripple court case’s end, XRP rallied in September 2022. It also rose after the Hinman ruling later that month. But a subsequent ruling on the relevant LBRY case, which labeled that cryptocurrency a security, sent XRP’s price spiralling down.
XRP to USD
Ripple is a cryptocurrency network that aims to bring fast, low-cost payments to financial institutions. It is powered by the XRP native cryptocurrency, which initially launched in 2013 to raise funds for the company.
However, in December 2020, the SEC sued Ripple Labs, claiming it had raised $1.3bn by selling XRP through unregistered security transactions.
Garlinghouse and Ripple Labs’ chair, Chris Larsen, claimed the sales were legal. Their argument was based on the so-called Howey Test, from a US court case, which determines whether an asset is a security.
While Ripple has not denied the sale of XRP, the cryptocurrency company has argued that it does not meet the Howey Test criteria. Specifically, Ripple argued, it did not meet the first rule, which requires an investment contract.
In September 2022, Garlinghouse said on Fox Business: “Our point is, Ripple doesn’t have a contract. With whom is the contract? It isn’t a written contract, it’s not an oral contract, it’s not an implicit contract.”
However, the SEC argued in its summary judgment motion that XRP met the “investment of money” criterion of the Howey Test.
There has been some confusion about the process. After The New York Times posted an article stating ripple “has dropped down the rankings since the SEC labeled it a security”, Alderoty corrected the publication. He tweeted: “To be clear, the SEC hasn’t labeled XRP a security, nor does it have the power to do so.”
To be clear, the SEC hasn’t labeled XRP a security, nor does it have the power to do so. One Judge put it this way: the SEC can only ask the question and the court ultimately answers. https://t.co/oMUjZwBkZo
The SEC declined a request from Capital.com for a comment.
Both the SEC and Ripple Labs filed motions for summary judgment (made public on 17 September 2022) to the judge in the case – Analisa Torres of the US District Court for the Southern District of New York.
On 21 September 2022, the court reviewed and granted the request for the Chamber of Digital Commerce, an American advocacy group for blockchain technology, to file an amicus curiae brief. The brief supported Ripple’s argument. It said:
The SEC took no position on the brief, according to defence attorney James Filan. However, the SEC said it may request more time if more amicus briefs were granted.
In response, Ripple’s defence team said: “This is yet another transparent attempt to further delay resolution of this case and the court should reject it.”
#XRPCommunity #SECGov v. #Ripple #XRP Ripple defendants object to SEC suggestion that the SEC will seek additional time or pages if other amici curiae submit briefs. “This is yet another transparent attempt to further delay resolution of this case and the Court should reject it.” pic.twitter.com/vTH9w2RV9t
Another motion was granted on 21 September 2022 that gave deadlines for motions to seal – requests that prevent evidence in a case being made public.
On Fox Business on 22 September, Garlinghouse suggested it was unlikely the case would go to trial, and expected a ruling from the judge instead. He said:
He said: “We think [the judge] has the information to make a ruling and we think that it is very clear that the SEC is grossly overreaching its authority.”
Garlinghouse criticised the SEC again on CNBC the following day. He said: “We think this is just a gross overreach of the SEC, trying to wrest control of that uncertainty that has existed [on regulation].”
Alderoty also commented on the need for regulation. He told Capital.com: “We will continue to fight this case so that the industry can get the regulatory clarity it desperately needs so that crypto innovation can flourish in the United States.”
In October 2022, the SEC and Ripple Labs submitted motions of opposition to the counterparty’s summary judgment filings. The legal teams restated their positions on whether XRP should be classified as a security.
A deadline of 30 November 2022 was set for Ripple and the SEC to file their replies in support of summary judgement, which were both published on 2 December. The same day both parties met to discuss any redactions in the court filing, and the summary judgments were made public on 5 December.
On 12 December 2022, Judge Torres granted an application by both parties that set a deadlijne of 4 January 2023 for non-parties to ask for court materials to be sealed.
This was followed by by the judge denying an SEC application to “redact the names of the consulting firms that assisted its expert witnesses” on 19 December 2022 as part of a series motions, which were granted, to seal court documents in connection with expert challenges.
This prompted a time extension request on 20 December 2022 from the SEC so it could file expert challenges (also known as Daubert motions) by 13 January 2023, which was approved a day later by the judge.
At the end of September 2022, Judge Torres ordered the SEC to hand over the documents by William Hinman, a former corporation finance division director at the SEC.
This was a win for the Ripple team, as the documents mainly referenced a speech given by Hinman at the Yahoo Finance All Markets Summit in 2018, in which he said that ether was not a security. According to Reuters, Hinman said:
The Hinman documents could be a key piece of evidence for Ripple as they could reaffirm its position that XRP is not a security.
The judge overturned the SEC’s objection on 29 September 2022, after the commission claimed it was protected by deliberative process privilege.
Ripple’s legal team received the documents on 20 October. Alderoty tweeted: “Over 18 months and six court orders later, we finally have the Hinman docs (internal SEC emails and drafts of his infamous 2018 speech). While they remain confidential for now (at the SEC’s insistence), I can say that it was well worth the fight to get them.”
However, on 22 December 2022, the SEC applied to keep the Hinman documents out of the public domain. In its motion, the SEC argued:
The private charter jet company TapJets and the payment provider I-Remit were the first to submit amicus briefs in support of Ripple. Both argued that the blockchain company was vital to their business.
However, the SEC asked the judge to deny these requests. The commission arguedthat the letters failed to explain the relevance with the ongoing court case.
In response, Ripple strongly stressed that the briefs provide an important perspective to the court on whether investors expected XRP profits. It said:
On 11 October, Judge Torres approved TapJets’ and I-Remit’s request to submit these briefs, giving them three days to file their documents, which were made public on 14 October and 12 October respectively.
Since then, more industry players have requested permission to send in amicus briefs in support of Ripple. A total of 16 different organisations have requested to submit briefs and the judge gave a deadline of 18 November to file these documents.
The latest to submit a brief was the Coinbase cryptocurrency exchange, which told the judge that Ripple did not have enough notice to comply with asset security laws. This was officially filed on 14 November. In its submission, Coinbase said:
An amicus brief from the Blockchain Association, a crypto advocacy group, was seen as another important addition to Ripple’s argument. It announced on 28 October that it was standing in support with Ripple. Kristin Smith, the executive director of Blockchain Association, said in a statement:
In response to these filings, the SEC filed a motion to extend the time to reply to these briefs with the new deadline proposed for 30 November 2022.
It also requested that any additional amicus briefs be handed in by 11 November 2022. Ripple consented and revised dates were adopted, according to Filan.
The win by the SEC in its case against the publishing crypto project LBRY in November 2022 could have set precedent for the XRP hearing.
This ruling has quite a few similarities with the XRP case. The SEC filed a complaint against LBRY claiming it had failed to register its initial token offering. Meanwhile, LBRY argued that its LBC token is not a security and that the SEC did not give fair notice.
Jeremy Hogan, an attorney and partner at the law firm Hogan & Hogan, tweeted: “I would expect this case to make its way into the SEC’s final brief in the Ripple case.”
LBRY fought the good fight but lost at summary judgment.
The Judge hung his hat largely on the fact that there was essentially no use for the tokens at the time of the sales.
I would expect this case to make its way into the SEC’s final brief in the Ripple case. https://t.co/IDlq8J4RMS
LBRY also turned to Twitter to voice its frustrations, saying: “The most f***ed up part of this whole situation is that even after five years of fighting and a court ruling, we still honestly do not know how to legally launch a public blockchain in the US.”
Then, on 21 November, a status conference was held between LBRY and the SEC. But according to the crypto project it was an “uneventful conference” and LBRY raised more concerns on Twitter.
It tweeted: “Judge said SEC should provide clarity on legal secondary sales, SEC smirked/laughed at him.”
Charles Hoskinson, the founder of the Cardano blockchain and cryptocurrency, has shared his views on the case on Twitter.
He argued that XRP, like most Layer 1 protocols, does not pass the Howey Test and is not a security. Hoskinson clarified that it was absurd to apply securities regulations to assets that have millions of international independent investors and users.
Ripple created something that has an ecosystem that will survive Brad, Chris, David or anyone else. The very fact that there is an independent XRP army criticizing me is proof of this reality. The ledger will run likely for decades trading value (5/16)
But he disagreed with Ripple’s approach to the case. Hoskinson said: “Thus it seems totally unnecessary to construct elaborate personal attacks on former and current government employees and also attack Bitcoin for its energy use or Chinese influence. Individual corruption has nothing to do with Howie [sic].”
In a separate thread, Larsen agreed with Hoskinson “on the larger point at hand”.
He tweeted: “There is no regulatory clarity on how to classify and use crypto in the US, which is why the SEC is using regulation by enforcement to bring all crypto under their remit. This affects all of us.”
However, Hoskinson has since been the target of abuse from the XRP community.
He posted a 15-minute video on Twitter about the XRP community and separately tweeted: “I’ve never seen a group so radically pick up a few words and run with it. Great job turning an ally into someone disgusted and totally checked out.”
After the filing of initial summary judgement motions on 17 September, XRP’s price saw a steady climb. It rose to a high of $0.55 on 23 September 2022, a 71% increase from the $0.32 low seen a week earlier.
The climb slowed slightly as investors awaited further news, but was reignited after the Hinman documents ruling. The token managed to break past the $0.50 barrier again and achieve a high of $0.54 on 9 October 2022.
In October 2022, Garlinghouse said at the DC Fintech Week conference that the end was in sight and the lawsuit would end in the first half of 2023. The Ripple CEO also said that he would consider a settlement, as long as XRP is not classified as a security.
XRP climbed again upon the arrival of the new amicus briefs and the new dates proposed by the SEC. It peaked at $0.507 on 5 November, but then plummeted after the LBRY news. The token’s price then dropped to $0.32 on 9 November 2022.
It saw slight gains that month after rumours, announced by Fox Business, that a settlement had been made between Ripple and the SEC in the Ripple lawsuit. However, Eleanor Terrett, a reporter for the channel, revealed in a since-deleted tweet that a Ripple spokesperson had dismissed this claim.
By 13 December 2022, the cryptocurrency was trading at $0.391, up 3.84% in the previous 24 hours. From there it fell to a periodic low of $0.334 on 19 December 2022, before recovering slightly to a high of $0.372 on 27 December 2022 dropping to close the year at $0.3399. January saw some growth, with XRP closing the month at $0.4064, before it slumped slightly to trade at around $0.3975 on 7 February 2023. By 29 March, however, the crypto had rallied and was reached a high of $0.5804.
At the time of writing, all eyes are on Judge Torres as the world of cryptocurrency awaits the outcome of the Ripple court case.
We don’t know for sure, although a ruling is expected to be made at some point in 2023. That will, ultimately, be the biggest bit of Ripple court case news to come.
If Ripple wins the XRP lawsuit, then it will be able to continue operating as before.
If the Ripple lawsuit outcome in unfavourable to the crypto company, it would mean that, in the eyes of the American authorities, XRP would be classed as a security. In turn, this would have an impact on the whole cryptocurrency industry in the United States.
We don’t know, because we are still waiting for the Ripple court case to finish. It could be that a win for the crypto company in the Ripple/SEC lawsuit could lead to the price going up and a loss in the Ripple lawsuit could cause it to drop, but we do not know for sure.
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