Namaste Yogis. Welcome to the Blockchain & AI Forum, where your technology questions are answered! Here no question is too mundane. As a bonus, a proverb is also included. Today’s question was submitted by Claire, and she wants to understand the legal battle between Ripple and the SEC.
Claire, you came to the right place. I’ll walk you through the twist, turns, and theater, of this legal case, from opening scene to today. First, we introduce the pugilists. Standing in the red corner is Ripple. Ripple is “… the leading provider of digital asset infrastructure for financial services”, according to its website. Ripple specializes in cross-border payments in real-time, tokenization, and digital assets while meeting regulatory compliance requirements. Full disclosure I own the Ripple token, XRP.
The SEC takes issue with “… while meeting regulatory compliance requirements”, portion of the Ripple statement. Accordingly, it filed a lawsuit against Ripple for non-compliance. But let’s not get ahead of ourselves because in the blue corner is SEC. SEC is a federal agency. Essentially, SEC is the securities police. SEC describes itself as follows: “Founded to help our country respond to the Great Depression, we’re the agency that protects investors from misconduct, promotes fairness & efficiency in the securities markets, and facilitates capital formation for those looking to hire, innovate, and grow.” With introductions completed, now we examine the case.
In December 2020, SEC sued Ripple alleging the sales and distributions of their token, XRP, constituted an investment contract and thus were subject to registration under the Securities Act of 1933. Although the case was filed in 2020, SEC says the trouble started in 2012 when Ripple was warned by SEC, and its own attorneys, about proceeding without registering XRP as a security. Wait, the story gets juicier. XRP founder, Larsen, understood this issue because in 2008 he was sued by the SEC for—securities violations–says SEC! But that didn’t stop Ripple. Beginning 2013 and continuing until 2020, Ripple sold 14.6B XRP tokens worth over $1.38B, according to the SEC lawsuit. Ripple used the proceeds to fund its operations and enrich their founders–Larsen and Garlinghouse—to the tune of $600M. SEC goes on to cite numerous examples, that it believes prove Ripple represented itself as a security.
Judge Analisa Torres, U.S. District Court of the Southern District of New York (Manhattan) and “the” court for securities matters, issued her ruling in 2023. Judge Torres said…
- XRP is not in and of itself a security
- Ripple’s sales of XRP on exchanges are not securities
- Ripple’s sales of XRP by executives are not securities
- A wide range of other Ripple’s XRP distributions to developers, to charities, and to employees are not securities
- Certain Ripple sales pursuant to written contracts were investment contracts and therefore securities
A gigantic victory for Ripple. SEC retreated and decided to go home, right? Wrong!
Mr. Gensler, the soon to be former SEC chair, filed an appeal. However, the appeal was narrow. The SEC is not challenging whether XRP is a security; it’s not. In fact, SEC clarified in 2023 that it does not consider XRP a security. By the way, XRP now joins Bitcoin and Ethereum in having explicit legal clarity as a non-security. If SEC didn’t appeal the security issue, what did it appeal? The SEC appeal is focused on whether Ripple’s own sales of XRP on crypto exchanges and other distributions (i.e., grants and charitable contributions) qualify as investment contracts. The Court agreed with Ripple, ruling that these sales and distributions did not require SEC registration. The SEC is appealing this narrow decision by Judge Torres. Ripple decided to silently accept the SEC appeal, right? Wrong again!
Ripple decided to file a cross-appeal. Oh, the legal fees! Lol. Ripple’s cross-appeal seeks to preserve all its defenses, including that an “investment contract requires traditional contractual rights and obligations. Ripple says it will continue to challenge SEC lawsuits, defending not just its own interests but those of the broader crypto community in the U.S. and globally.
Claire, hopefully you are better informed and will continue to follow my blog. Now I say goodbye with a proverb from Indonesia: “do not tie a knot if you cannot untangle it.”
Until next time,
Yogi Nelson
Blockchain & AI Forum 