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How Ripple plans to defend SEC charges over XRP token

How Ripple plans to defend SEC charges over XRP token
Written by publisher team

Less than a month ago, XRP was the No. 3 cryptocurrency by market capitalization, after only Bitcoin (BTC) and Ether (ETH). This week, XRP fell to the fifth position on some cryptocurrency exchanges. Its price has fallen 52% since December 22, when the Securities and Exchange Commission commissioned banking software company Ripple Labs to offer $1.3 billion in unregistered securities in 2013 when it began selling XRP. The charges also include two Ripple executives, co-founder and former CEO Christian Larsen and current CEO Brad Garlinghouse, who allegedly sold $600 million worth of personal XRP assets.

The central issue in the case: Is XRP safe?

The Securities and Exchange Commission believes it is, and says Ripple has promoted XRP to fund its business.

Ripple sells software products to banks and money transfer companies, some of which use XRP to speed up transfers and provide liquidity. In the wake of the Securities and Exchange Commission’s accusations, Ripple partners such as MoneyGram (MGI) and Tetragon have distanced themselves from the company. US crypto exchanges including Coinbase, Kraken, eToro and OkCoin are suspending trading support for XRP this month. Coinbase is now facing a lawsuit from a St. Louis client over trading fees that Coinbase collected from XRP transactions.

As exchanges rush to remove support for XRP trading, the risk of SEC action, CoinList General Counsel Carla Carivu points out, is that retail investors — the very people the SEC aims to protect — will not be able to get rid of from XRP. That is why a group of XRP holders filed a petition on January 1 asking interim SEC Chairman Elad Roesman to amend the SEC’s complaint against Ripple to make clear that their current holdings of XRP are not considered securities.

Read more: Ripple CEO: 3 Reasons XRP Isn’t Safe

The charges against Ripple were announced on the penultimate day for outgoing SEC chief Jay Clayton, so Ripple finds itself in limbo. Roesman is the interim chair of the Securities and Exchange Commission; President-elect Joe Biden’s pick for SEC Chairman is former CFTC Chairman Gary Gensler, who seems to be the crypto-friendly.

During the transition period, the Securities and Exchange Commission’s cyber unit continues the case against Ripple, and the next event is a pre-trial conference in New York scheduled for February 22. Given the icy pace at which the courts are moving, as well as the ongoing COVID-19 pandemic, an actual trial likely won’t happen until spring or later — if it gets that far.

Dan Roberts of Yahoo Finance and Andy Serwer interview Ripple CEO Brad Garlinghouse at the Yahoo Finance All Markets: Crypto Summit on February 7, 2018 in New York City. (Eugene Gologursky/Getty Images for Yahoo Finance/Oath)

SEC vs. ICO mutation

In all its enforcement actions against token-creating startups, the Securities and Exchange Commission (SEC) has relied on the “Howey test,” which comes from a 1946 case (SEC v. Howey) Involve the sale of shares in the citrus orchard.

The test determined, as former SEC official Bill Henman explained at the Yahoo Finance Crypto Summit in 2018, that an offering is a security if it “requires an investment of money in a joint enterprise with the expectation of a profit derived from the efforts of others.” In the SEC’s view, Most of the initial coin offerings during the infamous ICO boom were securities offerings because the coins were marketed with the expectation of a higher price, and also, as Hinman said, “sold to a broad audience rather than the people who would likely use them on the network.”

When it comes to XRP, Ripple is different.

In its response to the Securities and Exchange Commission, Ripple wrote, “The SEC theory, that XRP is an investment contract, is wrong in facts” and “amounts to an unprecedented and ill-considered expansion of Howey’s testing and enforcement of SEC power against digital assets.”

Several SEC officials have made it clear over the past few years that the SEC does not view Bitcoin or Ether as securities. Ripple CEO Garlinghouse has made the case several times in the past as to why XRP is not a security, and is seeking to block this action from the Securities and Exchange Commission; did not work. In a note to Ripple employees, he described the SEC’s action as an “attack on cryptocurrencies in the United States.” (The Japanese securities regulator does not view XRP as a security, and Garlinghouse recently threatened to move the company to Japan or Singapore.)

“XRP is a currency, similar to bitcoin and ether, that the SEC has determined not to be a security,” Ripple says in its letter from the Securities and Exchange Commission (SEC).

Ripple calling XRP a currency is an interesting thing, considering that Garlinghouse said at the Yahoo Finance 2018 Crypto Summit, “I don’t call this a cryptocurrency. It’s not a currency… this is a digital asset. If the asset solves a real problem For a real customer, there will be value in the asset.”

Ripple’s argument

In an empirical scenario, one of Ripple’s main arguments will be based on eight years of price data showing that XRP is not moving based on news about Ripple, according to people familiar with the company’s legal strategy.

One specific example: On June 19, 2019, when Moneygram announced that it had made Ripple its exclusive cross-border payment settlement partner, MoneyGram’s stock surged 170% in a single day. Ripple will provide data showing that XRP has remained flat. (On the other hand, CoinMarketCap data shows that XRP is up 15% over the next two days.)

Read more: Former CFTC Head Says XRP Isn’t a Security – But Ripple Is His Client

The SEC’s action against Ripple looks like it’s taking action against dozens of companies that have conducted initial coin offerings, including Airfox, Paragon, Telegram and Kik.

Ripple will seek to distance itself from the ICO boom, many of which have been made by companies that have no product or business model other than selling a token, by assuring that Ripple Labs as a company has been around for years before XRP was created, and that XRP has a healthy trading market in Hundreds of cryptocurrency exchanges without any connection to the company.

KATWIJK, NETHERLANDS - JANUARY 3: In this photo illustration, a visual representation of the cryptocurrency Ripple (XRP) is arranged on a hard drive circuit board on January 3, 2021 in Katwijk, The Netherlands.  (Photo by Yuriko Nakao/Getty Images)

In this image illustration, a visual representation of the cryptocurrency Ripple (XRP) is arranged on a hard drive circuit board on January 3, 2021 in Katwijk, Netherlands. (Photo by Yuriko Nakao/Getty Images)

As for the company’s own XRP sales, Ripple will argue that these sales represented only a fraction of all XRP trades, and because its XRP sales were done through exchanges and market makers on a blind basis, XRP buyers did not. They know they were buying it from Ripple, so it can’t be an investment contract.

But what if the Securities and Exchange Commission (SEC) made public why XRP is so closely associated with Ripple that anyone buying XRP viewed it as a bet on the company’s success?

Ripple Labs trademarked XRP in 2013, and even referred to the token as “ripples” for years (something the Securities and Exchange Commission specifically cites in its complaint), although it eventually stopped calling it that and started Asking the media not to call it that.

Ripple’s legal team believes that the history of what Ripple called the token is a red herring, according to the sources. The company also believes it is unfair that the SEC lifted the enforcement action at the end of the outgoing administration.

Ultimately, this section of the SEC’s complaint against Ripple may be pivotal: “The Supreme Court made clear in its 1946 Howey decision that the definition of whether an instrument is an investment contract, and therefore a security is a ‘flexible rather than fixed’ principle,” A system capable of adapting to meet the myriad and changing schemes devised by those seeking to use other people’s money on the promise of profit.” Security Flexibly.

The Securities and Exchange Commission believes that XRP has failed its “flexible” test. For the health of its business and for the XRP market, Ripple Labs will need to prove otherwise – even if Ripple says the market has nothing to do with its business.

Daniel Roberts is a traveling editor at Yahoo Finance and has been covering Bitcoin since 2011. Follow him on Twitter @readDanwrite.

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