On December 2, 2020, the Securities and Exchange Commission (SEC) filed a lawsuit against Ripple Labs and its CEOs. The case claims they offered and sold digital assets known as XRP as unregistered securities for seven years.
To understand the origin of the case, let us dig into the back story.
Ripple was founded in 2012 to offer a faster cross-border money transfer network as an alternative to SWIFT, which can take days to clear funds.
To solve the delay in SWIFT, Ripple came up with digital tokens called XRP and software that would enable banks to convert funds to XRP and vice versa almost instantly for faster money transfer.
In 2013, Ripple began to sell the XRP tokens to investors in the US and globally. Over the years, XRP has been used as a form of exchange in many organizations, with some countries declaring it a currency.
XRP is now available in banks, wallets, commercial platforms, money transfers, and some organizations use it to pay salaries and wages.
SEC alleged that Ripple and its two executives profited around $ 600 million from selling the unregistered digital tokens in their lawsuit.
Ripple Core Defense
In their defense, Ripple comes out in two folds.
First, Ripple claimed that SEC did not offer them fair notice that there were concerns about XRP, considering it has been on the market for seven years. Also, XRP was operating as a currency and not security following their registration with regulatory bodies.
Secondly, in 2018, William Hinman, the former director of SEC, gave a speech, which is available for viewing on their website, stating that offers and sales of Ether do not fall under securities.
Considering that speech, SEC should not sue Ripple for offering XRP as an unregistered security.
The Road Ahead
The speech from Hinman raised eyeballs regarding the case, with some top voices stating that the lawsuit is coming from an improper motivation.
The court has not yet resolved the case, but the court should settle it by early 2022.
What Has Been the Effect of the Case on the Prices of XRP?
Since the lawsuit, the value of XRP has dropped considerably. Buyers have been suspending their trade with XRP, while others are delisting it completely.
Ripple reported that the value of their currency has dropped by about 75% so far, and there is no hope of recovery until they settle the case, or worse, they will never recover if the court rules in favor of SEC.
SEC settles most of their cases out of the court, and Ripple hopes this will happen with their case considering the adverse effects they are suffering. However, SEC is doing everything in its power to weaken Ripple’s position.
Although this case is a massive blow to Ripple, it is essential for the whole crypto community because it will help differentiate currencies and securities.
If they rule out XRP as a security, Ethereum and any other token will fall under scrutiny even after ten years or more of operating as a currency.