Ripple (CCC:XRP) is likely to soon fall under the jurisdiction of securities law. The judgment is likely going to favor the Securities Exchange Commission (SEC). Ripple is going to end up being the biggest fish caught when all is said and done.
The SEC has already cracked down on other cryptocurrencies. It looks like it is looking to carry that momentum into a win against Ripple.
Ripple is the third-largest crypto and if the SEC is successful in proving that it is a security and not a currency, the two cryptos ahead may face scrutiny.
Back in October the SEC won its case against Kik Interactive proving the company had issued its KIN tokens as a security. Further, it also recently won a similar case against Telegram.
Ripple, the SEC and Crypto
The SEC decided to file suit against Ripple on Dec. 22 alleging that the company issued unregistered securities to investors in the U.S. and worldwide.
The SEC filed its case against Ripple in the same court in which it had success against Kik and Telegram. The case was filed in the Southern District of New York so the precedent cases do lend some momentum to the SEC in this case.
Before getting further into this discussion about the case against Ripple I believe it is clear that the SEC is gunning for cryptos. I fully expect it to have bigger targets in its sights should XRP be found to be acting as a security rather than a currency.
I also expect that beyond the implications for Ripple, there are larger implications for the crypto space as well. Although the SEC and its leaders have stated that Bitcoin (CCC:BTC-USD) and Ethereum (CCC:ETH) are currencies in the past, nothing regarding further oversight has been set in stone.
Case Against XRP
One of the central arguments is that Ripple, by choosing not to file a registration statement, created an information void. Ripple executives Brad Garlinghouse and Christian Larsen are named in the suit for creating a situation of information asymmetry.
The argument is that the named Ripple execs were selling XRP into the markets while only releasing information that they chose to share rather than that which would have existed had Ripple completed a registration statement.
The SEC considers the $1.3 billion in XRP sales from 2013 to 2020as constituting an ongoing unregistered securities offering.
Another important aspect of the SEC argument is that Ripple was creating hype around XRP. The SEC has established this in prior cases finding that “Token issuers should not tout, promote, promise or take action to secure future liquidity to purchasers, including exchange listings.”
The SEC case will also hinge upon other precedents within the Howey Test established by the Supreme Court in the landmark 1946 case, SEC vs. Howey.
Dissenting Opinions and Contradictions Abound
The SEC has concluded that Bitcoin and Ethereum do not constitute securities but rather currencies.
Ripple has filed a Freedom of Information Act request in connection to the SEC’s 2018 determination that Ethereum isn’t a security. This despite the fact that Ethereum held an Initial Coin Offering, which bears some similarities to a security offering.
Despite the SEC’s apparent contradictions most opinions do seem to favor Ripple indeed acting as a security. It is hard not to feel that there is bigger momentum here which will affect the bigger fish in the crypto space. It’s hard not to feel that a crackdown on the entire industry is well underway.
The Bottom Line
Whether the SEC wins its case against Ripple remains to be seen. However, it looks as if Bitcoin and Ethereum are going to face further regulation soon.
“We determined that bitcoin was not a security, it was much more payment mechanism and store of value,” said former SEC Chairman Jay Clayton. Clayton added that more regulation of crypto is coming in any case.
JPMorgan Chase (NYSE:JPM) CEO Jamie Dimon contends that the SEC and the government “can regulate whatever they want when they feel like it.” For that reason he is hesitant regarding Bitcoin.
Biden’s pick to head the SEC will take a tough stance on regulation as well. Ripple is in trouble and there is no reason to buy it now. The company had trouble as a payments method, meeting little success. Now it is likely to be judged as a security spelling massive trouble.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.
