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Ripple Gains Victory in Battle with SEC, But Will It and XRP Win the War?

Cryptocurrency is at a pivotal moment in its short history.

With various coins testing new all-time highs and Bitcoin ETFs finally gaining long-sought approval, it seems as though the market is on the cusp of a big breakout. However, at the same time, regulators appear to be increasingly snapping at crypto’s heels, and nowhere is this more apparent than with Ripple, which is currently embroiled in a high-profile legal battle with the US Securities and Exchange Commission.

Ripple (XRP) Logo

This tussle between Ripple and the SEC has increasingly come to be viewed as a litmus test for the regulatory viability of the rest of the cryptocurrency market. Because if the presiding judges do agree with the SEC and declare that ripple (XRP) is an unregistered security, consistency would likely demand that a whole range of other cryptocurrencies be classed as (unregistered) securities in its wake. This would obviously be devastating for the industry, yet conversely, if Ripple emerges triumphant from the case, crypto would likely receive a significant — and market-boosting — dose of clarity.

Fortunately, judgments in the last week have proven encouraging for Ripple, with Judge Sarah Netburn ruling that the SEC needs to explain where Ripple explicitly created an expectation of profits from the sale of XRP. However, while this tilts the scales more in favor of Ripple, an SEC motion for a two-month extension to the discovery period has also been granted, meaning that the whole case is likely to drag on well into 2022.

SEC Grants Ripple Motions in Legal Tussle with SEC

Quick recap: the SEC charged (in December 2020) Ripple and two of its executives (Christian Larsen and Brad Garlinghouse) with conducting an unregistered securities offering. The cryptocurrency market responded by selling XRP en masse, a process amplified by the fact that a number of crypto-exchanges serving US-based customers de-listed the cryptocurrency.

Fast forward to last week, and Judge Sarah Netburn of the Southern District of New York granted two motions filed by Ripple, thereby improving the latter’s prospects.

Specifically, Judge Netburn ordered the SEC to identify where and how exactly Ripple created an expectation of profit via the purchase of XRP. As stated below, the SEC now has to find any investment contracts or other materials and documentation produced by Ripple which explicitly told buyers/investors that they would likely enjoy a profit if they purchased XRP.

“Ripple’s interrogatory is relevant (and precise) and will clarify whether the SEC contends that the terms of any contract […] created an expectation of profits by the purchaser of XRP. Accordingly, Defendants’ motion regarding Ripple Interrogatory No. 2 is GRANTED, and the SEC must supplement its response to Interrogatory No. 2 to identify any specific contractual terms and not just “implicit and explicit promises” as previously identified,” states the order from the SDNY court.

Secondly, Netburn has also effectively ordered the SEC to answer whether XRP satisfies the Howey/Howie test, insofar as she has asked the regulator to answer whether it believes efforts by Ripple have been necessary to cause any increase in XRP’s price.

“As discussed with respect to Interrogatory No. 2, the parties’ conflict over the application of Howey and its progeny does not render Ripple’s interrogatory improper. Defendants’ motion regarding Ripple Interrogatory No. 11 is GRANTED.”

These are the two main Ripple motions granted by Netburn, with other interrogatories either denied (in one case) or granted in part (insofar as the SEC will have to submit supplementary material to previous responses). For example, Netburn has also ordered the SEC to submit supplementary material concerning its previous judgments as to whether bitcoin (BTC) and ethereum (ETH) are securities, something which may or may not turn up significant information.

However, while most of Ripple’s motions weren’t granted in full, the two that were are arguably pretty decisive. This appears to be the reasoning of crypto-specialized attorneys observing the case, such as Jeremy Hogan.

Source: Twitter

Supporters Continue to Think Ripple Has a Strong Case

Such reactions suggest that Ripple’s case is now looking increasingly strong. However, lawyers following the case from the start have also tended to think that Ripple has always had a good case, and that the SEC is biting off more than it can chew.

For instance, CryptoLaw founder John E. Deaton has long noted that the SEC, or at least some SEC commissioners, had viewed XRP as a currency and not a security.

Source: Twitter

Likewise, Deaton tweeted back in April that it was highly significant the SEC didn’t seek a preliminary objection against Ripple, in order to stop it selling XRP. Why? Well, because in contrast to cases (e.g. Telegram) where a preliminary injunction was sought and granted, the SEC likely believes it doesn’t have a strong enough case.

Source: Twitter

Basically, if you’re an XRP holder right now, you may feel quietly confident that the eventual settlement — when it does come — will be favorable towards Ripple. In turn, you’d probably expect a notable price increase more or less overnight.

However, it now seems XRP holders will have to wait even longer for such a ruling, since one other thing Judge Sarah Netburn did is grant the SEC’s motion to extend the discovery period (where both sides seek documentation and information) by another two months. This means the period will end, not in early November, but on January 14.

This is unfortunate, if only because it extends the current uncertainty surrounding Ripple even further into the future, thereby causing an additional accumulation of pain for XRP holders. This has already been made manifest by the fact that Canada-based exchange CoinSmart responded to the extension by announcing that it would delist XRP effective from November 22.

Source: Twitter

Needless to say, the dragging out of this case is potentially very damaging for Ripple and XRP. Because even if Ripple does have a strong legal argument, the indefinite postponement of a resolution could result in the loss of potential partnerships and potential adoption, as would-be users and partners turn to rival platforms with a seemingly more secure legal base.

Indeed, John E. Deaton has even gone so far as to argue that there is an ulterior motive for the SEC’s suit against Ripple, and that it may have been intended as a means to prejudice the latter while indirectly benefiting rivals such as Ethereum.

Deaton refers to then-SEC commissioner Bill Hinman’s 2018 speech stating that BTC and ETH aren’t securities. Source: Twitter

As comforting as such claims may be for XRP holders, they don’t change the fact that the suit has happened and that it continues to damage the cryptocurrency and its native platform. While there’s a very good chance it will secure a good settlement and continue growing, it remains to be seen as to whether it will make up the lost ground in the more distant future.

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CryptoVantage Author Simon Chandler

About the Author

Simon Chandler

Simon Chandler is a journalist based in London. He writes about technology, markets and politics, and has bylines for Forbes, Digital Trends, CCN, Wired, TechCrunch, the Verge, the Sun, the New Internationalist, and TruthOut, among many others. His Twitter handle is @_simonchandler_

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