In late 2020, the US Securities and Exchange Commission (SEC) charged Ripple, a San Francisco-based company that offers a cross-border payment infrastructure, and two of its executives, with conducting an unregistered securities offering of $1.3bn by selling their cryptocurrency XRP.
Now, after over two years of legal conflict, a verdict is very soon awaited from the Southern District Court of New York.
The court’s decision in the Ripple case will have a profound impact on the entire crypto market, and whatever side the judgment takes, it will affect the future of cryptocurrencies and their place in the global financial system.
The essence of the Ripple case lies on whether XRP falls or not, within the definition of a “security” under the so called “Howey test” -the legal test created by the US Supreme Court in 1946 to determine whether a transaction qualifies as an investment contract, and therefore a security. Under the test, an investment contract is defined as “an investment of money, in a common enterprise, with a reasonable expectation of profits, to be derived from the efforts of others.”
The SEC has long maintained that most cryptocurrencies, including XRP, fall under the definition and thus are securities, and on this basis, that Ripple was in violation of federal securities’ law.
Ripple is challenging the SEC’s analysis on two main fronts, arguing that 1) its sale of XRP does not qualify as an investment contract because no contracts were signed when the transactions took place, and 2) XRP does not satisfy the requirements of the Howey test.
If the court rules that XRP is a security, it could mean that most other crypto tokens are too, bringing them under the SEC’s supervision, with registration and reporting requirements for crypto firms, and possible legal consequences for entities that have issued or traded tokens without SEC approval.
Undoubtedly, such a ruling could be “very bad news” for many crypto businesses.
Looking at the matter with a wider look, the issue at hand for the crypto industry, is whether the SEC has the right to regulate crypto.
Gary Gensler, the chair of the SEC, has already called for crypto businesses to register with the agency, given that many crypto tokens are securities.
Since the collapse of the crypto exchange FTX in November, which took hundreds of millions of dollars in customer funds down with it, the SEC has been aggressively putting efforts to regulate the crypto industry. Since then, the SEC has launched a series of actions against crypto businesses serving the US market. In January, it has charged crypto exchange Gemini and crypto lender Genesis Global Capital, over a service that allowed US customers to earn interest on their assets, which the agency alleged was an unregistered securities offering and also warned to sue crypto firm Paxos over its BUSD stablecoin.
However, over the past few weeks, the SEC has been strongly criticised for its objection to crypto exchange Binance purchasing the assets of bankrupt crypto lender Voyager Digital and asset management firm Grayscale.
One thing is clear: while we still move in somewhat unchartered territory within a regulatory environment for crypto both in the US and in the EU that is taking shape as we speak, the court’s decision in the Ripple case, will draw strong lines on the map as to how things will move in the future:
it will significantly affect how cryptocurrencies are classified, regulated, traded and used and shape the future of the crypto industry.