In December 2020, the Securities and Exchange Commission (SEC) filed a lawsuit against Ripple Labs, the company behind the XRP cryptocurrency, alleging that XRP is an unregistered security. This led to many cryptocurrency exchanges removing or suspending XRP trading on their platforms due to regulatory uncertainty.
What are the allegations against Ripple and XRP?
The SEC alleges that Ripple, its CEO Brad Garlinghouse, and co-founder Chris Larsen raised over $1.3 billion through the unregistered ongoing sale of XRP since 2013. According to the SEC, XRP meets the definition of a security under the Howey Test, which states that an asset is a security if it involves an investment of money in a common enterprise with a reasonable expectation of profits from the efforts of others. By failing to register XRP as a security and continuing to sell it, Ripple and its executives allegedly violated federal securities laws.
The SEC argues that XRP buyers made an investment of money into Ripple’s common enterprise when they purchased XRP, expecting to profit from Ripple’s efforts to boost the value of XRP. Ripple maintains that XRP is a currency, not a security, and Ripple did not violate any laws by selling XRP without registering it as a security.
Why did exchanges delist or suspend XRP trading?
After the SEC filed its lawsuit, major cryptocurrency exchanges like Coinbase, Binance.US, OkCoin, and others moved to delist XRP trading or suspend it indefinitely. Exchanges likely wanted to err on the side of caution and avoid potential regulatory issues if XRP is deemed an unregistered security. Delisting removes legal and reputational risks for exchanges associated with selling an unregistered security to U.S. investors.
Some key events relating to XRP delistings:
- December 2020: Coinbase, Binance.US, OkCoin, and others halt XRP trading for U.S. customers
- January 2021: Additional exchanges like Bitstamp, Bittrex, and CrossTower halt XRP trading
- February 2021: Kraken exchange delists XRP for U.S. customers but keeps it available for international users
By early 2021, most major exchanges stopped XRP trading for U.S. customers, with only a handful like Uphold keeping it available.
What will it take to relist XRP?
For U.S. exchanges to relist XRP, there likely needs to be major clarity from regulators that XRP is not considered an unregistered security. This could potentially happen through:
- The SEC lawsuit results in a favorable outcome for Ripple where XRP is definitively declared not a security
- New guidance is issued by the SEC outlining that XRP falls outside the definition of a security
- Legislation passes defining certain cryptoassets like XRP as currencies instead of securities
Unless one of those scenarios occurs, major exchanges will likely err on the side of caution and keep XRP deactivated for U.S. customers indefinitely to avoid potential violations.
What are the broader implications of the Ripple lawsuit?
The SEC’s lawsuit against Ripple could have major implications for the broader cryptocurrency industry:
- Regulatory uncertainty – The unclear status of XRP as potentially an unregistered security casts doubt and uncertainty on if/how other major cryptocurrencies will be regulated.
- Chilling effect – Projects may be less willing to launch in the U.S. or move forward with development if concerned tokens could later be ruled unregistered securities.
- Exchange operations – Exchanges now have to carefully evaluate if coins could be deemed unregistered securities and face delisting/lawsuits.
- Investor concerns – Some investors may pull back from the cryptocurrency space given the increased perceived legal/regulatory risks.
The Ripple case could establish precedent on how cryptocurrencies are regulated and may lead to additional scrutiny and lawsuits from the SEC against other major projects.
How did the lawsuit impact XRP’s price?
XRP’s price declined significantly following news of the SEC lawsuit in December 2020. Here is a timeline of events and XRP’s price movements:
|December 22, 2020
|SEC lawsuit announced
|January 4, 2021
|Coinbase delists XRP
|January 14, 2021
|Grayscale liquidates XRP trust
|February 1, 2021
|Additional exchanges delist XRP
|September 9, 2021
|Court rules part of SEC case can proceed
|October 8, 2023
As the table shows, XRP fell over 50% from $0.58 to $0.28 in the immediate aftermath of the lawsuit news and exchange delistings. Despite recovering at times, XRP remains around 25% below its pre-lawsuit price today as the case drags on.
What is Ripple’s defense against the SEC allegations?
Ripple is mounting an aggressive legal defense against the SEC’s charges and making several key arguments:
- XRP is a currency, not a security – Ripple contends that XRP functions as a digital currency for cross-border payments, not an investment contract under the Howey Test for securities.
- No common enterprise between Ripple and XRP holders – Ripple argues there is no profit-sharing agreement or common enterprise between Ripple and other XRP holders.
- XRP is decentralized – Ripple claims the XRP Ledger is decentralized and Ripple does not control or manage XRP transactions.
- Fair notice defense – Ripple says the SEC did not provide fair notice that XRP could be considered an unregistered security.
Ripple alleges the SEC contradicted earlier guidance stating ether was not a security and failed to clarify XRP’s status beforehand. Overall, Ripple’s main defense rests on denying XRP is a security subject to SEC registration.
What is the current status of the lawsuit?
The SEC vs. Ripple lawsuit remains ongoing as of October 2023. Some key updates:
- September 2021 – Court rejected Ripple’s fair notice defense but allowed the case to partially move forward.
- December 2021 – Requests for SEC internal XRP communications ordered to be released.
- August 2022 – Ripple scored a win with XRP officially deemed a currency under the FX market regulations.
- September 2022 – Ripple formally moves for case dismissal citing regulatory overreach.
The case is now in the discovery phase as both sides gather evidence to support their claims. While considered a positive development for Ripple, the August 2022 currency classification did not directly impact the security allegations. The lawsuit may continue well into 2023 barring a settlement as the court weighs both sides’ arguments.
Could Ripple settle with the SEC?
Ripple could potentially attempt to settle with the SEC to end the lawsuit, though it has signaled its intent to fight the case in court. Some factors that may impact settlement prospects:
- No admission of wrongdoing – Ripple would likely not accept any settlement that admits XRP is a security.
- Fine amount – The SEC originally sought to recover $1.3 billion from Ripple, which Ripple would not accept.
- XRP clarity – A settlement may not provide full clarity on XRP’s status, though Ripple wants explicit declaration it’s not a security.
- Change in SEC leadership – A new SEC Chairman could potentially take a different view and be more open to settling.
Despite call for settlement from some XRP holders, Ripple seems committed to pursuing the case in court for now unless the SEC offers extremely favorable terms.
Could XRP be relaunched as a new token?
If XRP is ultimately declared a security, one hypothetical option is for Ripple to relaunch XRP as an entirely new token. This new “XRP 2.0” would be redesigned with the goal of passing the Howey Test for utility tokens and avoiding classification as a security. However, significant challenges exist:
- Current holdings would likely be wiped out – Existing XRP holder balances could not be carried over to a new token, resulting in major losses.
- Loss of exchange and liquidity infrastructure – New token would have to rebuild exchange listing and liquidity base from scratch.
- Significant centralization concerns – Highly centralized relaunch by Ripple could reinforce security designation.
- Technology changes – Moving to an entirely different blockchain would disrupt infrastructure relying on existing XRP Ledger.
While theoretically possible as a last resort if XRP were clearly deemed a security, a token relaunch would face massive hurdles and opposition from the XRP community. The existing XRP token continuing without changes is the far more likely scenario even if deemed a security initially.
In summary, XRP was removed from most major U.S. exchanges following the SEC’s December 2020 lawsuit alleging unregistered securities sales by Ripple. Delisting XRP trading protected exchanges from potential regulatory violations if XRP is ultimately deemed a security. For XRP to relist, there likely needs to be clear guidance from the SEC or a court ruling declaring XRP not a security. Ripple is vigorously fighting the lawsuit with mixed results so far, but the case may continue for some time absent a settlement. The lawsuit has already exerted a chilling effect on the crypto industry and further rulings could impact the regulatory trajectory of cryptocurrencies more broadly. For now, the likelihood of XRP trading widely resuming for U.S. investors remains low barring major positive developments for Ripple in the lawsuit.