Christopher H. Loo, MD-PhD
SEC versus Ripple Labs: History, Status, and Implications
by: Christopher H. Loo, MD-PhD
Note: blog post outlined and partially written by Jasper AI, which is a software platform that is an AI-powered copy generator and writing assistant.
In December of 2020, the SEC took action against Ripple Labs (XRP) for allegedly selling $1.3 billion worth of unregistered securities.
Based on the “Howey” test, the SEC is claiming that the Ripple token (XRP) is a security. The outcome of this case could have major implications for investors and entrepreneurs looking to shape the cryptocurrency landscape.
In this blog post, we’ll take a look at the history of the SEC’s actions against Ripple, the current status of the case, and what the implications could be if Ripple Labs is found guilty.
Historical context and current status of SEC versus XRP
Ripple Labs is a company that focuses on providing innovative solutions to moving value across the blockchain through the XRP token. The most notable use case is using the XRP token for cross border payments, enabling global money transfers.
As a result of the SEC action against Ripple Labs, XRP was delisted on major US exchanges including Coinbase and Gemini, but can be found on non-US exchanges such as Binance, FTX, and KuCoin.
Many cryptocurrency traders and investors have continued to hold and/or trade the XRP token through Web3 wallets including Coinbase and MetaMask wallets.
The SEC’s lawsuit against Ripple is not the first time the regulator has taken action against a cryptocurrency company. In 2017, the SEC filed suit against Initial Coin Offering (ICO) startup GAW Miners and its owner Joshua Garza for allegedly running a Ponzi scheme. The SEC also shut down crypto investment fund Centra Tech in 2018 for allegedly defrauding investors. And in 2019, the SEC charged blockchain startup Kik Interactive with conducting an illegal $100 million ICO.
While the SEC has taken action against other cryptocurrency companies in the past, the commission is seeking much harsher penalties in its suit against Ripple Labs (XRP).
The SEC is asking for Ripple to be fined $1.3 billion, which is three times the amount that GAW Miners was fined and ten times the amount that Centra Tech was fined.
Furthermore, the SEC is seeking to have Ripple’s co-founders — Jared Rice Sr. and Charles Hoskinson — barred from serving as officers or directors of any public company.
What does this mean for the future of Ripple and XRP?
How will this impact other cryptocurrencies?
What does this mean for investors in XRP and other cryptocurrencies?
Ripple Labs disputes the charges and argues that XRP is not a security.
Ripple seeks to prove the SEC has taken an unclear, contradictory and arbitrary approach to regulating crypto.
Key to their argument is that assets that function solely as a means of exchange in a decentralized network are not a security, even if they could be packaged and sold as a security.
These ideas were highlighted by former SEC Corporation Finance Division Director William Hinman at a speech delivered at the Yahoo Finance All Markets Summit in June 2018, where he said ether (ETH) was not a security because, like bitcoin, it was “sufficiently decentralized.”
If Eth is not a security, then why is XRP considered a security?
On September 29, 2022, Ripple Labs scored a huge win when a US District Court judge ruled to have the SEC release emails and other correspondence written by William Hinman, which the SEC repeatedly sought to hide early drafts and other documents related to the matter. The court’s recent ruling will require the SEC to produce Hinman’s documents for Ripple Labs.
The SEC claims that these are the opinions of one individual and not those of the agency and are protected by attorney client-privilege.
It is unclear what the current ruling has on the overall outcome of the case. However, at stake is the key question about whether tokens are securities for which there are no clear guidelines currently in the United States.
The Ripple case could set a standard that could be applied to other token projects. If the company wins, there could be standing for continuing token sales to fund decentralized project development. However, if Ripple is fined $1.3 billion and its co-founders are barred from serving as officers or directors of any public company, it would set a precedent that would make it riskier for entrepreneurs, and cryptocurrency investors. This could lead to less innovation in the space and “brain drain” to other jurisdictions as entrepreneurs become more wary of running afoul of regulators.
Ultimately these are tough questions that will most likely ultimately fall upon the legal system to determine what constitutes a token and what constitutes a security.
So stay tuned to see how this case plays out — it could have far-reaching consequences for the cryptocurrency industry, including the Ethereum token.
About: Dr. Christopher Loo is a physician who became financially free at the age of 29, and retired early at the age of 38, as a result of making strategic investments after the 2008 financial crisis. A graduate of the MD-PhD program offered jointly through the Baylor College of Medicine and Department of Bioengineering at Rice University, he is the author of “How I Quit My Lucrative Career and Achieved Financial Freedom Using Real Estate”, and is the host of the Financial Freedom for Physicians Podcast. He is a regular contributor to KevinMD and has spoken about the importance of financial literacy for Passive Income MD, the White Coat Investor, Board Vitals, SEAK Non-Clinical Careers, SoMe Docs, Doximity, Medpage Today, FinCon, and other high-profile financial brands geared towards high-income professionals. He is passionate about the role that crypto, fintech, and innovation will play in enabling financial freedom, economic inclusion, access and opportunity for the entire world in the upcoming decades.