Ripple stood firm in a court case against the U.S. Securities and Exchange Commission (SEC), achieving a significant victory for itself and the entire blockchain ecosystem.
The blockchain and cryptocurrency ecosystem continually introduces innovations to decentralize and democratize the financial industry. The Ripple project is one of these innovations, enabling financial exchanges across various domains. Like other sectors of this new world, it has faced expert support and significant backlash from traditional financial systems and regulators. One of these attacks on Ripple was an unequal battle with the U.S. SEC. Ripple stood its ground in a highly publicized court case, securing a crucial—yet incomplete—victory for itself and the entire blockchain ecosystem.
Traditional financial and banking systems have always faced numerous difficulties in transferring assets. When Bitcoin and other cryptocurrencies emerged, the transfer challenges were reduced, yet users still faced problems and concerns. The world of blockchain, this technological revolution, is constantly growing, so efforts have continuously been made to derive optimal solutions from cryptocurrencies. One of the blockchains established in recent years to improve the status of financial transfers is the digital currency, Ripple.
Ripple’s decentralized American ecosystem is a vast blockchain project that acts like a bank on a small scale and serves as a network for financial and banking transfers on a larger scale. In simple terms, this network was created to facilitate the movement of assets in the world of cryptocurrencies and tokens, rivaling the SWIFT blockchain or the international interbank money transfer system.
Ripple is a competitor and blockchain equivalent to SWIFT, the international interbank money transfer system.
The parent company of this network, Ripple Labs, faced a lawsuit from the U.S. Securities and Exchange Commission (SEC) when seriously establishing and solidifying its position, leading to a challenging court case. As of the writing of this article, this legal and commercial dispute has been ongoing for over 2.5 years; in July of this year, the case was nearing its conclusion, and Ripple has achieved some victories, though it has not attained complete success, even though it was acquitted of most of the significant charges. But what was the subject of this lawsuit? This article will provide an overview of Ripple’s blockchain network and the subsequent court proceedings.
A Brief Overview of the Ripple Blockchain Network and the Cryptocurrency XRP
Ripple, with the symbol XRP, is the native token of the Ripple blockchain. The Ripple blockchain provides a simplified mechanism for payments and financial transfers on an international scale. The XRP Ledger enables users to exchange various networks, cryptocurrencies, or fiat currencies. This open-source blockchain project began in 2012 as a decentralized peer-to-peer system. Notably, the initial ideas for this network date back to 2004, when Ryan Fugger worked on RipplePay. In 2011, with Fugger’s agreement, other individuals joined in its development, leading to a change in the project and company name. Initially, this blockchain was written in C++, but it now utilizes Java, JavaScript, and Python in its structure and continues evolving using these languages.
This cryptocurrency project allows users to transfer their blockchain assets without intermediaries or complex processes. Ripple effectively facilitates financial exchanges between different countries. Over the years, Ripple has collaborated with several financial institutions to enhance its products. Ripple is not just a blockchain currency; it is a multi-faceted project that leverages its native token to streamline processes. Currently, Ripple’s digital currency is traded on many exchanges, and companies like Coil and Omni are using it to innovate and develop various Web3 capabilities.
The Ripple network, known as RippleNet, has a clear mission to execute transactions and financial exchanges quickly and accurately. RippleNet aims to enhance traditional banking systems through various mechanisms and to accelerate international financial transactions. Ripple leverages smart contracts, supported by three innovative products and a robust, lightweight ledger to achieve this. It would be entirely accurate to refer to Ripple as an ecosystem. Thus, the Ripple ecosystem enables individual and institutional users, financial institutions, organizations, and banks to conduct various financial transactions quickly, comply with regulations, and transparently.
Developers and Investors of the Ripple Project
The Ripple blockchain project was officially launched by the company’s management group called OpenCoin. One year after its establishment and the start of the project, the company’s name was changed to Ripple Labs; however, in 2015, the company and project names became the same. The individuals leading this project and company are prominent figures in programming and blockchain. The key people at Ripple Labs include:
Ryan Fugger:
This Canadian programmer is part of the Ripple management team and is considered the original brain behind the Ripple blockchain. He started with RipplePay in 2004.
Jed McCaleb:
This American entrepreneur is one of the project’s main programmers and developers. He currently serves as the CEO of an aerospace startup and is the Chief Technology Officer (CTO) of Ripple Labs. He is directly involved in developing various technical aspects of Ripple.
Arthur Britto:
He is a co-founder of Polysign and Ripple and previously worked on designing and developing computer games.
David Schwartz:
He manages the technology of the Ripple network and is one of the project’s original founders. Schwartz is regarded as one of the main architects of the Ripple cryptocurrency ledger and focuses specifically on this blockchain. Before joining Ripple, he held senior management positions at startups in Silicon Valley.
McCaleb, Britto, and Schwartz had a company called NewCoin in 2011 and joined Ripple with Fugger’s approval, changing their company name to OpenCoin.
Chris Larsen:
He is an American investor, entrepreneur, and businessman who has spent many years in Silicon Valley startups and is considered a co-founder of Ripple. His involvement in 2012 marked the beginning of Ripple’s serious execution phase.
Bradley Kent Garlinghouse:
He has been the CEO of Ripple since 2015. Before taking on this role, he was the CEO of Hightail and served as the head of customer programs at AOL for two years. He was also the senior vice president at Yahoo. He is an active investor, having invested heavily in over 40 tech companies, and is among the leading investors in several projects, including the Diffbot project and the staffing platform Wonolo.
Two Features of Ripple
A Non-Mining Cryptocurrency:
Ripple utilizes a pre-mining protocol, where 100 billion tokens were created all at once before the mining process began. These tokens are gradually released over time. This approach allows for planning financial supply and transfer processes based on pre-existing tokens. This is deemed essential for financial transactions as it prevents intrinsic value and market management harm.
Distribution and Supply of Ripple Tokens:
The parent company distributes the Ripple token monthly, and its supply can reach up to one billion per month, although such occurrences are rare. Typically, this process is conducted with public announcements regarding the release of new tokens. This cryptocurrency began operations for 10 cents and reached $1.65 in mid-2021. Of the total tokens, 55 billion are held in reserve by Ripple.
Ripple has implemented an exciting method to stabilize the price of XRP. A minimal amount of XRP is collected as a transaction fee and subsequently destroyed for each transaction. This way, the cost of the token remains relatively stable in the short term while allowing for reasonable and gradual growth in the long term. However, significant fluctuations in the overall cryptocurrency market or specific events can lead to substantial changes in the price of this token. Additionally, calculations indicate that it will take over 7,000 years for the supply of XRP to be utilized fully.
Ripple charges and burns a minimal amount of XRP as a transaction fee for each transaction to help stabilize the price of XRP.
Strengths and Advantages of the Ripple Blockchain
It can be confidently stated that the Ripple ecosystem is on the right path, having taken significant steps toward creating a new generation of financial transfer systems. This network has numerous strengths and advantages that distinguish it from other networks. These advantages can be summarized as follows:
High Speed:
The federated consensus protocol significantly increases the speed of transactions and exchanges. Additionally, other innovations within this network enable transactions and ledger updates to be completed quickly. Compared to traditional banking systems, where transaction times can span several hours or even days, the high speed of the Ripple network truly stands out.
Low Transaction Fees:
The lower energy consumption due to the structure of the Ripple network results in very minimal transaction fees. One-millionth of a Ripple is called a “Drop,” and each Ripple transaction incurs fees equivalent to just a few drops.
Dedicated Decentralized Exchange:
This ecosystem also functions as a decentralized exchange, allowing users to easily trade and convert their assets within its framework and enabling transactions with tokens other than XRP.
High Scalability:
Well-known blockchains, such as Bitcoin, often need help with scalability. This can become problematic during busy periods with high transaction volumes. However, Ripple can support thousands of transactions per second without problems or limitations.
Weaknesses of Ripple
No project is flawless, and Ripple is no exception. Some of the weaknesses of this project include:
Increased Centralization:
Ripple uses “trusted validators” to confirm transactions and maintain the integrity of its blockchain. The absence of a mining process means that fewer individuals are involved in securing this blockchain. This can lead to increased security risks.
Pre-mining:
Ripple operates on a pre-mining protocol and periodically releases a small amount of XRP to the public at designated intervals. Some investors are concerned that Ripple may release too much XRP at once, potentially decreasing the value of this cryptocurrency. However, Ripple has denied the likelihood of this happening, stating that its token release plan will not affect the value of XRP.
Legal Battles:
Like many other cryptocurrencies, XRP faces extensive regulations, debates, and legal disputes from government authorities. In 2021, significant legal issues arose for this cryptocurrency in the United States, and the continuation of this legal battle has persisted to this day.
What Led the SEC to Take Ripple to Court?
Ripple was officially launched in 2013 to create a secure system for asset transfers and transactions in the crypto world using its native token, XRP. Two years after its launch, various organizations, including the Financial Crimes Enforcement Network (FINCEN)—a part of the U.S. banking system—recognized Ripple as a secure, convertible virtual currency. This meant that the XRP token did not fall under the category of securities and was classified as a non-security asset. Following this recognition, both the native token and Ripple itself gained significant value. Most exchanges listed XRP for trading, and several governments and central banks accepted it as a secure and convertible digital currency that was classified as non-security. However, the U.S. Securities and Exchange Commission (SEC) had long claimed that digital assets, including cryptocurrencies, were similar to stocks and bonds and required regulatory oversight.
In 2015, the U.S. Financial Crimes Enforcement Network (FinCEN) referred to Ripple as a reliable and convertible virtual currency.
On December 21, 2020, as the world was trembling with fears of the COVID-19 pandemic, Jay Clayton, the former SEC chairman, announced that the agency had filed a complaint against Ripple in the Southern District of New York in his final days in office. The lawsuit targeted Ripple’s CEO, Brad Garlinghouse, and its co-founder, Chris Larsen, accusing them of illegally raising over $1.3 billion by selling XRP.
The SEC’s complaint argued that XRP should be classified as a security, similar to stocks or bonds, and thus be subject to SEC regulations. Notably, about nine days before this announcement, Ripple’s CEO had tweeted that such a lawsuit was likely imminent, stating that they had been aware of the situation for less than a week (since December 7).
The SEC lawsuit claimed that XRP should be classified as a security, similar to stocks or bonds.
The SEC claimed that since 2013, the cryptocurrency XRP had been sold as an investment contract without being registered as a formal stock or security. The SEC’s argument relied on a U.S. Supreme Court ruling, the Howey Test. According to this historic ruling from 1946, when an investment instrument is designated within the framework of a contract or any financial agreement, and individuals use others’ money to promise profit, the regulatory framework falls under securities law. Thus, obtaining SEC approval and adhering to that legal system is mandatory, and failing to secure such approval constitutes a violation of the law that may even be deemed a criminal act. The Howey Test provides a high degree of flexibility and mobility to laws and contracts, enhancing the regulatory capabilities of oversight bodies.
Ripple’s initial response differed from other financial projects embroiled with the SEC. Their reaction fully acknowledged U.S. laws, stating they would cooperate with the SEC under its regulations. However, Ripple contended that the SEC had misunderstood the existing statutes and facts regarding Ripple. They argued that XRP is a convertible and accepted cryptocurrency under U.S. law. Holders of XRP tokens have no stake in the company’s shares, profits, or managerial and decision-making processes, meaning that XRP does not fit into the legal framework of securities and stocks in the United States. Thus, Ripple claimed the SEC had no right to intervene in Ripple Labs’ affairs. This position indicated Ripple’s intention to go to court and defend itself, a rarity in such cases. Typically, companies resolve issues outside the court by accepting the regulations, acknowledging mistakes, and paying fines, thus avoiding lengthy legal processes that can lead to product bans or significant financial losses.
Following the SEC’s complaint, a wave of events unfolded. Initially, the value of XRP plummeted by over 60%. Many cryptocurrency exchanges removed XRP from their listings. Partner companies announced the termination of their collaborations, while some filed lawsuits for damages or sought to buy back shares from Ripple’s management. Additionally, individuals in various U.S. states summoned Ripple for multiple legal disputes. The court began scrutinizing the history of activities and financial information of Ripple’s executives, board members, and major investors. All these developments occurred within a month, creating a dire situation for Ripple. Nonetheless, the company was committed in its decision to go to court to defend itself and advocate for the broader crypto and blockchain ecosystem.
The presiding judge in this case was Analisa Torres, and the first court date was set for February 22, 2021. Due to the COVID-19 pandemic, preliminary hearings and sessions were mainly conducted online. One of Ripple’s primary defenses asserting its innocence was that the company had never received any prior warnings from the SEC indicating it was violating securities laws or that its transactions and contracts fell under such regulations. The SEC conceded that Ripple’s claim was accurate, marking a significant point in Ripple’s favor.
One of Ripple’s key arguments for acquittal was that it had not received any warning from the SEC regarding violating securities laws, which the agency also acknowledged.
Legal Proceedings Between Ripple and the SEC Before the Ruling
- On December 21, 2020, the U.S. Securities and Exchange Commission (SEC) filed a legal complaint against Ripple Labs, accusing the company’s executives of issuing unregistered securities. Despite this, Garlinghouse announced that Ripple would defend itself in court.
- On December 28, 2020, Coinbase, one of the largest cryptocurrency exchanges, removed the XRP token from its platform. This action was likely influenced by the ongoing legal dispute between Ripple and the SEC, along with uncertainty regarding the classification of XRP as a security.
- Following this, on January 29, 2021, Ripple formally requested the court to compel the SEC to release information indicating that Bitcoin and Ethereum were not classified as securities. This request remained unanswered for some time.
- On March 3, 2021, Larsen and Garlinghouse submitted a letter to the court arguing that the SEC had acted incorrectly in classifying XRP as a security and questioned the SEC’s judgment regarding its claims against market participants.
- On March 8, 2021, in response to Larsen and Garlinghouse’s arguments, the SEC requested an expedited hearing on the matter. During the hearings, the SEC requested that the court issue a ruling to allow for the release and review of financial records of Ripple’s executives from the past decade.
- On March 12, 2021, Ripple’s executives submitted a letter requesting that the court deny the SEC’s request, arguing that it violated their “right to privacy.” The letter was addressed to Sarah Netburn, another judge in that district and one of the main judges on the case.
- With the change of administration in the U.S. in 2021, it was expected that the new SEC chair would end the lawsuit, but this did not happen.
- On March 22, 2021, Judge Sarah Netburn ruled that XRP possesses value and utility, distinguishing it from cryptocurrencies like Bitcoin and Ether. This ruling marked a significant advancement in the case and highlighted the distinction between digital assets.
- On April 9, 2021, the Southern District Court of New York finally stated that the release of financial records of Ripple’s individuals and employees violated their privacy rights, and the SEC could only access records related to XRP transactions.
- On April 13, 2021, SEC Commissioner Hester Peirce published the Safe Harbor Proposal, suggesting a three-year exemption for this token from being classified as a security. The aim was to allow the token’s developers to better understand their position within decentralized networks during this period.
- On May 7, 2021, the court again received the SEC’s request for access to all XRP sales information, which was denied on May 30.
- On June 14, 2021, the court extended the SEC’s deadline to disclose its policies regarding cryptocurrencies to August 30. This extension gave the SEC more time to publish its operations regarding cryptocurrency exchanges and any potential conflicts of interest.
- On August 10, 2021, the SEC sought full access to communications, messages, and emails between Ripple and Slack, claiming that Ripple’s submissions were incomplete. Ripple initially requested the court reject this demand, stating that data had been deleted and that recovering one terabyte of information and negotiating it would cost over a million dollars. This time, the judge ruled in favor of the SEC.
- Ripple submitted its renewed request for the release of the SEC’s cryptocurrency policies in August 2021. Under an extended deadline, the SEC was required to disclose its internal policies regarding cryptocurrency trading by August 31 to clarify its actions and potential impacts on the case.
- On September 3, the judge ruled that the SEC’s internal policies should be released. At this time, the court also required the SEC to disclose its policies regarding its employees and their transactions, leading to the rejection of Ripple’s request to publish details of SEC employees’ transactions.
- On October 15, 2021, a deadline was set to gather expert opinions on cryptocurrencies and securities; the goal was to present various expert views on the case.
- On January 24, 2022, Judge Netburn granted the SEC until February 17 to reconsider its previous decision, which required Ripple Labs to disclose certain sensitive government documents.
- By June 2022, Ripple’s situation appeared complicated and discouraging. In an interview, the CEO of Ripple stated that if they lost in court, the Ripple Labs project and company would exit the United States.
- On September 17, 2022, Ripple Labs and the SEC filed their initial motions for summary judgment, a significant step in the legal proceedings. These motions and arguments outlined each party’s stance on the case.
- On September 21, 2022, the court reviewed and approved a request from the Chamber of Digital Commerce, an American pro-blockchain advocacy group.
- After the November 30 deadline, Ripple Labs’ and the SEC’s responseswere publicly released, reflecting their defenses in the legal case. These documents provided further insight into the legal arguments of both parties in response to each other’s requests.
- On December 2, 2022, Ripple submitted its final defense, requesting the court to declare that the SEC had not provided sufficient evidence to prove that XRP falls under the category of securities.
- On December 22, 2022, the SEC requested to prevent the release of “Hinman” documents regarding the Ripple legal case. These documents included any references made to the company by Ripple Labs in court. The Hinman documents pertained to the potential impact of this company in the long-running legal battle between Ripple and the SEC. William Hinman, the former Director of the SEC’s Division of Corporation Finance, had classified Bitcoin and Ethereum as not securities in his emails and writings.
- On June 12, 2023, despite the SEC’s insistence on disregarding the Hinman documents, these documents were finally unsealed and made public after a lengthy legal process. The public release of these documents added new dimensions to the legal battle between Ripple and the SEC. Stuart Alderoty, Ripple Labs’ legal officer, stated about this issue: “This achievement was worth fighting for.”
The Final Ruling in the Ripple Case: The End of the Road?
On July 13, 2023, Judge Analisa Torres announced in her 34-page ruling that the sale and offering of Ripple’s XRP token on public exchanges did not violate laws nor classify this cryptocurrency as a security. Ripple Labs was exonerated from one of its most significant accusations; thus, this digital currency succeeded in its legal battle against U.S. regulators.
“Ripple has not violated the law by selling XRP tokens on public exchanges, and this action complies with federal securities laws.”
— Analisa Torres (Judge in the SEC’s case against Ripple)
Judge in the SEC’s case against Ripple
Although the U.S. Securities and Exchange Commission (SEC) announced after this ruling that it intends to appeal the court’s decision and requested that Judge Analisa Torres’s ruling be reviewed in an appellate court, the SEC believes that XRP tokens traded publicly comply with federal securities laws.
However, Judge Torres’s ruling was not a complete victory for Ripple. In a follow-up to her decision, she determined that the sale of the token to certain institutional investors, capital-raising firms, and liquidity providers constituted a violation of securities laws and SEC regulations, providing the SEC with a minor victory. Consequently, SEC officials expressed hope and satisfaction that Ripple had violated the law.
Additionally, 18 days after this trial, Jed Rakoff, a U.S. District Judge holding the same position as Analisa Torres, ruled contrary to her decision, stating that the SEC’s claim that the Terra USD token offered by Terraform Labs should be classified as a security when sold on a public exchange, is valid.
Ultimately, both sides of the case declared themselves as having won in some way.
Torres concluded that Ripple’s $728.9 million sale of XRP to hedge funds and other institutional clients constituted an unregistered securities sale, giving the SEC a partial victory. As a result, SEC officials expressed optimism and satisfaction that Ripple had violated the law.
On the other hand, Ripple’s executives and cryptocurrency industry participants regard this ruling as a significant victory for the blockchain world.
“I hope this event gives financial institution customers the assurance to engage in discussions about resolving the issues they are experiencing in their businesses.”
— Stuart Alderoty, Chief Legal Officer of Ripple Labs
For instance, Gemini Exchange, which had removed the ability to trade Ripple from its platform following the SEC’s lawsuit, announced after the court ruling that it would reactivate the ability to trade Ripple.
Gemini even went further by posting a video on its Twitter account depicting Ripple defeating the SEC in a battle. In this humorous video, they included an image of Gary Gensler, the head of the SEC, stating, “The earth is a security.” Following this, Ripple was illustrated attempting to escape this ruling by migrating to the moon.
Gensler has initiated over 100 cases against cryptocurrencies, although many of these cases have ultimately been dismissed.
“The Commission needs ‘new thinking’ to address the financial stability challenges posed by new technologies like predictive analytics and machine learning.”
— Gary Gensler, Chairman of the SEC
While the court ruling is seen as a victory for cryptocurrency exchanges and the blockchain ecosystem, when Gensler was asked whether this ruling would affect his position on cryptocurrencies, he, skilled in evasion, stated that this legal battle is still ongoing.
Nevertheless, Gensler expressed disappointment over the recent ruling by the judge that Ripple Labs did not violate federal securities laws, noting that this decision dealt a significant blow to his efforts to regulate cryptocurrencies. He also stated, “The Commission is still evaluating the court’s decision; however, we are pleased with part of the judge’s ruling that believes Ripple should not have sold its XRP tokens directly to investors.”
The legal proceedings will likely continue following a mutual victory for both parties in the case, namely the SEC and XRP. Ripple may appeal the court’s ruling or provide new reasons for disagreement with the verdict. Alternatively, Ripple might seek to negotiate with the SEC to resolve outstanding issues.
It is also essential to note that the SEC filed simultaneous cases related to Ripple and similar matters against exchanges like Binance and Coinbase, which remain unresolved.
“We were on the verge of signing a contract with a stablecoin issuer in the last quarter of 2020, but that deal never materialized because it was around that time that the SEC filed a lawsuit against Ripple.”
— David Schwartz, Chief Technology Officer of Ripple
Why the Ripple vs. SEC Lawsuit Matters
The lawsuit between Ripple and the SEC is significant for cryptocurrencies because it could clarify the regulatory status of digital currencies and how they should be classified by the SEC. If the court sided with the SEC’s claims, it could set a painful precedent for other cryptocurrencies, leading to increased regulation and oversight in the industry. This issue affects Ripple XRP and other projects that have initial coin offerings (ICOs) or sell tokens.
The SEC’s case against Ripple arose when blockchain projects operated with minimal oversight and regulation, creating significant shockwaves within the cryptocurrency space. There has always been a fear that cryptocurrencies will be under the scrutiny of regulatory bodies from now on. Still, this case is the most prominent example of a securities regulator targeting an initial coin offering.
Overall, the ruling that eventually comes down for the Ripple and SEC case could have broader implications for regulating cryptocurrencies and other digital assets. This ruling could serve as a precedent for how similar regulatory processes can be handled against cryptocurrency companies.
Bill Morgan, a lawyer and cryptocurrency enthusiast, believes that the SEC aims to define all cryptocurrencies under securities law. He states that the SEC’s recent activities do not only target cryptocurrency exchanges but will also impact developers and providers of cryptocurrency wallets. According to Morgan, disruption in progress is one of the effects of the SEC’s lawsuit on the cryptocurrency community.
“After our lawsuit concludes, the struggle for many other companies will begin. In any case, the fight for legal clarity in the cryptocurrency industry must continue.”
— Brad Garlinghouse, CEO of Ripple
The final words of the legal battle between Ripple and the U.S. Securities and Exchange Commission (SEC) illustrate that the crypto world faces challenges and narrow-mindedness regarding legal and regulatory issues, and there is a long way to go to reach a reassuring point. It is worth mentioning that Ripple’s stand was a reliable starting point for clarifying processes and policies and paving the way for the rights of the cryptocurrency industry to be upheld.
