March 7, 2023
7 min read
The cryptocurrency space is ever-changing and evolving, and as such, sometimes it isn’t easy to keep track of everything that’s occurring. However, one recent piece of news that has been on everyone’s lip is Ripple’s cryptocurrency lawsuit regarding XRP, which the Securities and Exchange Commission (SEC) believes is security. The SEC is a U.S. body created to oversee various markets, protect investors and the national banking system. Their main aim is to prevent the manipulation of markets by companies.
Ripple was founded in 2012 and operated in San Francisco as RippleNet and XRP payment protocol. Ripple’s XRP would be one of the most popular and one of the largest cryptocurrencies by market cap today, if you didn’t know already. Recently, things began looking grim due to the lawsuit handed down to the CEO. As a result, XRP was slightly pushed from the third spot maintained for a very long time. So what’s going on with this case, you might ask? Frankly, that’s what will be looked at throughout this article – and why this is the biggest and most talked-about cryptocurrency trial in history.
The real deal and meat of the matter here is that the SEC is suing Ripple for an allegedly USD 1.3 billion sale of its cryptocurrencies while not registered as a security in 2013. Therefore, the SEC is highlighting that Ripple’s XRP is deemed a security and should be treated as such, which is why they are in breach of the law and regulatory acts.
When we think of this question as to whether XRP is a currency or security, it also brings about other questions. Is it a currency that can be used, such as the dollar or gold, or is it unregistered security that is tradable, similar to stocks, or bonds as alleged by the SEC? If we determined the answer to this question, Ripple would be a security. This is because it was already declared by the Financial Crimes Enforcement Network back in 2015.
Subsequently, this brings about some other controversial questions because if it was already declared a security, you might be wondering why Ripple continued with its actions. Nonetheless, that is not very easy to answer because Ripple has various customers in many different jurisdictions. Some countries already also declared that XRP is not secure, such as Japan, for instance. Ripple also stated that their XRP ledger is open source and has a growing community similar to other cryptocurrency projects like Ethereum.
One aspect to take note of is the fact that Ripple is the company that is currently being sued by the SEC, and XRP is the cryptocurrency. In essence, the notion that the SEC is proposing as to why they are suing XRP; is the fact that XRP is a security and not a currency; nonetheless, on the other hand, Ripple is holding a different stance on the matter. Another pointer here is that one of the main reasons the company issued is that they allegedly sold over 1 billion tokens and promoted XRP by paying companies or bodies to aid in this act. These activities were done back in 2013. Currently, there is a lot of speculation: why the SEC allowed Ripple to function as a currency for more than eight years, and now the company is slapped with one of the most significant lawsuits in history.
The SEC also disclosed that Ripple sold these unregistered securities to U.S. customers and other countries across the globe. This complaint was filed in the federal district court in Manhattan after the SEC’s research and investigation team put the evidence together to present it before the courts. Both Ripple and two of their executives are currently being sued, namely, Christian Larsen and Bradley Garlinghouse.
Upon announcing the news to the cryptocurrency community, XRP fell more than 30% in a single day, and this certainly caught most traders and holders off guard. Many significant companies who also had holdings in XRP, such as Grayscale, liquidated or sold their positions a few days after the news broke.
With new technology, there will always be difficulties for governments and other individuals to accept and get on board. Cryptocurrencies are one such asset class that has been scrutinized much from their inception. As a result of this, there have been numerous lawsuits with many other cryptocurrency projects other than Ripple. Likewise, some of these same cases are currently still in session at the time of writing.
It’s not strange that there will be difficulties for CEOs of various cryptocurrencies to know what guidelines they should adhere to since there is little to no regulation. This is primarily because the crypto space is emerging, and regulators have difficulty finding a flat ground with these new assets. Two other popular cryptocurrencies with lawsuits were Kik Interactive Inc over Kik Messenger’s KIN token and Telegram’s GRAM token ICO. Well-known CEOs of messaging application companies created these two projects. However, their projects were terminated due to regulatory issues and lawsuits against them.
Kik is a popular messaging app used by many individuals in the eastern world, its largest market. In 2017, the company made an Initial Coin Offering (ICO) sell tokens to the public. The SEC stated that the tokens’ selling was illegal because Kik offered and sold tokens to U.S. investors without undergoing the necessary steps to do so. They did not register the sale as security either. Therefore, it was deemed illegal hence they were sued for over 5 million USD in a filing by the SEC in 2019. The case was finally settled in October 2020.
In the same light, Lantah LLC was furious over the GRAM ticker’s use by Telegram- one of the most popular communication and team applications. This led to them getting their fair share of legal discipline from the SEC as well. While the Securities and Exchange Commission was not too harsh with their delicate, they were ordered to pay over 625 million USD to Lantah LLC. This lawsuit brewed from the token sale of the GRAM tokens sold by Telegram in 2018 and raised over 1.7 billion USD in an ICO.
The lawsuit ended with Telegram losing because the SEC investigated and found out that they raised money illegally since they were not registered as a security. Since the lawsuit, Telegram has abandoned the TON project and said that they no longer need to use the GRAM ticker. They also refunded over 70% of all investors’ funds in 2018. Additionally, Telegram agreed to pay the SEC 18.5 million USD as a civil penalty to settle the case. The company will also notify the SEC if they plan to offer any digital asset type soon.
While Congress has the ultimate power in making the rules and laws governing these new asset classes, there is little that they have said about cryptocurrencies. This in itself poses a threat for these assets since it is then left down to the mercy of independent regulators to use their discretion to determine what steps to take. Since the U.S. Congress is not making any rules and regulations, it is unclear what their stance is regarding cryptocurrencies.
In Ripple’s case, it seems that the goal of the SEC is to support consumers and prevent them from getting harmed from an investment such as the XRP cryptocurrency. In the past, though, the regulatory bodies aimed to protect Silicon Valley giants and help consumers, which was enforced by the Obama Federal Communications Commission (FCC). As we all know, with new leaders, there are new rules that are also one reason why Ripple finds itself in this current situation.
Many countries have accepted blockchain technology and adopted cryptocurrencies; however, in the United States, things are a bit different for the most part. There is very little being done to accept blockchain and cryptocurrency technology. Additionally, the little strategies they have employed are not enough to facilitate this emerging asset class’s growth and mass adoption. Some of the strategies that the U.S. adopts are not mind-blowing, but more can be done for cryptocurrency and blockchain technology.
One of the good things here is that the United States has not openly banned Bitcoin or other cryptocurrencies – More can certainly be done in terms of strategies for crypto mass adoption, though. Secondly, there are numerous blockchain and crypto-related companies in the U.S. that are allowed to operate despite not being a traditional business. This means that there is a similar ground for new blockchain businesses to operate somewhat freely in the U.S.
Finally, some states are more fond of cryptocurrencies to the point where they can be used as a means of payment. Some of the most cryptocurrency-friendly states include Texas, Ohio, Colorado, and Wyoming. As mentioned before, this is certainly not groundbreaking for a first-world country like the United States; nonetheless, it is a good leap forward in the right direction. They seek to find more strategies that they can utilize to handle blockchain technology.
While these steps are not the only things that can be done to adopt cryptocurrencies and blockchain technology, it is evident that more work needs to be done. On the other hand, the conflicting and contradicting approach that U.S. regulatory bodies are taking; makes it even more difficult for the country and government to develop more concrete strategies to adopt cryptocurrencies. Many other countries, such as China, are way ahead of the game and are making it their duty to help pilot the transition from fiat to a digital dollar.
Regarding the Ripple lawsuit, this might be one of how the U.S. loses the digital race. So how will this happen? Put, if emerging blockchain and cryptocurrency companies fear what happened to Ripple, they will either forget about their contribution to adopting the technology or migrate to other cryptocurrency-friendly nations. As a result, this will lead to more innovations for other countries such as China, which will benefit significantly by dominating these technologies.
Regulation is vital in any emerging market since it will help lay down the rules and laws regarding how businesses and individuals should operate. With regards to the U.S., it is clear that regulators such as the Securities and Exchange Commission (SEC) lean more towards protecting the customer than anyone else. On the other side of the spectrum, though, it is clear that the SEC did not have any issues with numerous Chinese firms that currently value more than 2.2 trillion to list on U.S. exchanges. Furthermore, these firms did not undergo any form of audit or disclosures for U.S. investors exposed. These events have also been occurring for more than two decades now, and there is nothing that the SEC did to penalize these companies.
Thus, this presents another issue as the U.S. will be willing to adopt cryptocurrencies and blockchain technology. They should be protecting U.S. customers at all costs, but this is not the case. So how is it that they seem to be more lenient towards some companies, yet Ripple faces one of the most significant and most challenging lawsuits in history? This shows that China is most likely flourishing in the U.S. financial markets while it is the latter for most US-based cryptocurrency companies trying to get a breakthrough in the industry.
If we should backtrack a bit and take a look at the previous lawsuits with the Securities and Exchange Commission; the shocking truth is that they have hardly ever lost any lawsuit with various individuals or companies that they believe have violated regulations regarding the U.S. monetary or banking system and manipulated the markets to their benefit. While there is no way for us to know if Ripple will lose the lawsuit honestly, the history shows that the SEC is not a body that ‘goes down very quickly in a court battle. In the end, the world will have to wait to see what the courts determine to be Ripple’s faith and what it will mean for similar cryptocurrencies and other blockchain startups.
Hypothetically, if Ripple is indeed successful and the courts agree that it is not a security, this would be excellent news for the entire cryptocurrency space and particularly holders of XRP. First and foremost, winning an SEC battle has a massive amount of weight to it, and that would most likely be the signal that XRP is indeed the global payment solution and cryptocurrency of the future. Nonetheless, the most that we can do at this point is wait and see what grounds both parties will have to settle on. This case will most likely be ongoing for a great deal of time, so a resolution might not be anywhere in sight for 2021.
Every day, it gets more evident that blockchain technology and cryptocurrencies are the future, and Ripple’s XRP is one cryptocurrency that the industry believes is important for mass adoption. It has low transaction fees to facilitate moving large amounts of money from one border to the next. Despite the current lawsuit, customers are still drawn to Ripple’s XRP cryptocurrency as they seek new ways to manage their finances. By using cryptocurrencies such as XRP, individuals have the freedom of having a bank in their pockets and can send and receive payments across the globe.
It is also evident here that this is not the first time the SEC has hit cryptocurrencies with lawsuits. Other than negatively affecting the token price, the entire space is also affected when these things happen. When the case is settled at the end of the trial, it still does not mean that Ripple will be allowed to carry out every objective that the team had for XRP, which is not suitable for the space or holders of the XRP cryptocurrency. Ripple’s CEO- Brad Garlinghouse, brought to the media’s attention that the SEC allowed XRP to be operated as a currency for close to a decade and is now saying that it is a security. He also made it clear that they do not foster innovation and growth in the U.S.
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