Just over a month ago, on Nov. 24, XRP’s value soared to over $0.90 on the U.S. cryptocurrency exchange Coinbase, although briefly, leading many backers to assume that the digital currency was all set to skyrocket again, perhaps even retesting its January 2018 all-time high of over $3.
However, following the latest litigation by the United States Securities and Exchange Commission against Ripple, not only does a potential rise in valuation seem increasingly impossible for XRP, but the future of the project as a whole may be in jeopardy. The key point of the SEC against the digital currency generated by Ripple is that it was “security” from the very beginning and, as such, should have been registered with the government body before being made available for purchase by American citizens.
In addition, the SEC argued that Ripple, CEO Brad Garlinghouse and CEO Chris Larsen were incorrect because they were able to buy more than $1.38 billion from the sales of the XRP token. As a result of these claims, the fourth-largest market capitalisation crypt collapsed by 24 per cent in just 24 hours.
And although XRP experienced a small relief window on Dec 25, increasing by about 40%, the announcement by the SEC led to several major crypto exchanges delisting or freezing the token. Initially, it was only platforms such as OSL, Beaxy and CrossTower that temporarily stopped trading or removed XRP from their platforms, but more recently, the U.S.-based trading platform BitStamp announced via Twitter that it would ban customers from trading and depositing XRP as of January 2021. Ben Zhou, CEO of ByBit Cryptocurrency Exchange, said:
“SEC and Ripple will have their day in court with due process of law, so we shall not prejudge the case in the court of public opinion. It is of course likely that the case will take up much of Ripple’s attention and resources. […] We hope a clear precedent and framework emerge from these proceedings.”
The nitty-gritty of the case
In its complaint, the SEC put forwards a reasonably simple claim that XRP had never been registered with the body and that Ripple’s executive arm did not make any effort to request an exemption from registration. Accordingly, from the Commission’s point of view, this leads to a sustained pattern of fraudulent sales of non-registered, non-exempt securities pursuant to Section 5 of the Law Securities Act of 1933.
What appears odd to others, though, is that the case has been brought before a federal court in New York, even though Ripple’s headquarters are in California. The simple explanation for this is that Ripple has one of its offices located in the Southern District of New York, and some of Garlinghouse’s public comments concerning XRP have been made within the state. Not only that, a large amount of XRP tokens have been sold to New York residents, which, in legal terms, makes it perfectly fine for the case to be brought before a New York court of law.
Again, the lawsuit names Larsen and Garlinghouse personally—in order to recover whatever money they have earned from their various fundraising efforts—even if the original XRP was sold by Ripple’s wholly-owned company, XRP II LLC. In this regard, the SEC argues that both entities have unlawfully sold substantial sums of XRP—1.7 billion XRP by Larsen and 321 million XRP by Garlinghouse—even though it does not do so.
Providing his thoughts on the matter, Todd Crosland, CEO of cryptocurrency exchange CoinZoom, stated that the lawsuit casts a large shadow over the price of XRP, claiming that it will be interesting to see how things play out as “Lack of institutional support will hurt liquidity,” adding: “Institutions will not bet against the SEC, and will be unloading their positions and will avoid taking new positions in XRP until the lawsuit is resolved.”
What are the implications of the lawsuit?
If the SEC succeeds in its prosecution efforts, Ripple will be framed as the primary violator, with both Larsen and Garlinghouse facing serious legal implications, as both are alleged to have participated in the pattern of XRP sales.
Technically speaking, the SEC’s issues with XRP stem from the fact that the digital currency satisfies key elements of the Howey test under federal securities laws, thus leading to the question of how exactly Garlinghouse and Larsen were able to take part in the token’s various sales efforts.
The Commission is now trying not only to recover all of Ripple’s ill-gotten profits, but also to indefinitely prohibit designated defendants from ever selling unregistered XRP or engaging in the sale of unregistered, non-exempt securities. Not only that, but also the SEC is demanding an undisclosed civil monetary penalty, the exact amount of which has not been made public.
A twist in the tale?
The continuing saga of the XRP comes at a time when SEC Chairman Jay Clayton resigned, and his duties were taken over by Elad Roisman, who was named acting chairman of the U.S. financial regulator. Also, in a recent letter to Clayton, Joseph Grundfest—former SEC commissioner — was allegedly quoted as saying that while the Ripple lawsuit is an “unprecedented” event, “no pressing reason compels immediate enforcement action.” He added: “Simply initiating the action will impose substantial harm on innocent holders of XRP, regardless of the ultimate resolution.”
In the midst of all the above-mentioned cases, Garlinghouse has consistently repeated that it would “aggressively fight” the supposedly unjustified actions of the SEC against Ripple before the court and will rest only after the argument has been proved to be totally untrue. In addition, he also stressed that while he had the chance to negotiate with the SEC, he had opted not to take the easy way out.
It remains to be seen what fate, or the American judicial system, has in store for Ripple. As of print, XRP is trading at $0.29, with the asset displaying a seven-day decline of nearly 50%.
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