Don’t Bet Too Heavily on Ripple As Court Case Continues

Typically, when a company is under the scrutiny of the Securities and Exchange Commission, that doesn’t send an encouraging message to would-be investors. Initially, Ripple (CCC:XRP-USD) reacted to the lawsuit the way anyone would expect, with the token initially cratering following the SEC’s lawsuit against founder Ripple Labs, alleging that XRP was really an unregistered security.

A concept token for XRP (XRP) with stacks of tokens in the background.

Source: Shutterstock

However, two major developments in the case have decidedly swung the needle in favor of the controversial token. First, Magistrate Judge Sarah Netburn stated in March that the Ripple coin has utility, which damaged the SEC’s assertion that XRP is an equity unit. In my view, Judge Netburn has a point. From the get-go, it appeared to many that Ripple Labs was creating a blockchain-based replacement for traditional wire transfers.

Second, the court allowed Ripple Labs access to the SEC’s discussion regarding Bitcoin (CCC:BTC-USD) and Ethereum (CCC:ETH-USD), two cryptocurrencies the regulatory agency defines as such. The SEC contends that BTC and ETH are virtual currencies because their respective founders don’t profit from the sale of said tokens. However, this assertion comes from former SEC chairman Jay Clayton, who did not establish any formal rules or standardization of defining what is or isn’t a cryptocurrency.

Therefore, the Ripple team asserted that it was basically capricious and arbitrary for federal regulators to define virtual currencies on the fly. Further, the Wall Street Journal’s editorial board hammered the SEC on this point, stating that a lack of clearly established frameworks harm investors.

It’s hard to argue against this narrative simply on logic and core ethics. To break a law, that law has to exist in the first place. If the SEC doesn’t have a clear definition of what a cryptocurrency is, then what exactly is the problem?

Still, don’t take that heavy-handed bet on XRP just yet.

Ripple Investors Should Not Be Complacent

Judging by the extreme sentiment for Ripple tokens, it’s obvious that swarms of investors are not taking a cautionary approach. Between April 4 and April 13, XRP more than tripled in value. True, it’s come down significantly since then. Nevertheless, XRP is trading hands on midday April 21 at $1.37, far higher than 50 to 60 cent range it was at in late March and early April.

Apparently, investors are looking at the Ripple story from a purely logical perspective. The SEC doesn’t know what a cryptocurrency is. Therefore, it can’t allege any infraction against something that has no set definition or framework.

But the sticking point is that the SEC doesn’t need to prove whether or not the Ripple coin is a cryptocurrency. This line of thinking is a distraction. Rather, the agency must prove that XRP is primarily a security. The fact that XRP is also a cryptocurrency is beside the point.

If you’ve read my prior stories on cryptocurrencies, you know that I’ve been advocating for the platform for many years. But I’m also a realist. The U.S. government cannot let innovation run amuck because that would reek of free market capitalism – and we can’t have that in a capitalist country.

Thus, the SEC is going to come after Ripple Labs with everything it has. I’m not saying I like it. But I am saying we should be ready for it. Perhaps this is partially the reason why XRP led other cryptocurrencies in a bout of weakness; it’s unlikely the government will give up so easily.

Indeed, the SEC can go back on the warpath, claiming that even if no formal rules about cryptocurrencies have been established, Bitcoin and Ethereum are fundamentally different from Ripple because the big two can be publicly mined. Ripple cannot.

Is it not one of the major tenets of virtual currencies that the public – not centralized authority figures – help determine their underlying supply and demand equation? If so, Ripple still has a problem that no legal sleight of hand can fix easily.

Don’t Get Trapped Emotionally

Of course, with XRP shooting to the moon once again, it’s easy to feel the temptation of FOMO or the fear of missing out. With multiple crypto coins breaking all-time price records, Ripple could do the same, especially if the lawsuit turns out favorably.

Nevertheless, I would say that this is a big risk. We crack jokes about government incompetence all the time. But when it comes to cryptocurrencies, Uncle Sam is adopting a much more serious tone. For instance, the IRS recently stated that the U.S. loses $1 trillion every year due to tax cheats.

With the relative anonymity of cryptos long representing concern for the tax agency, I don’t think it’s a coincidence that federal authorities have started to come down hard on cryptos. So bottom line is: don’t be too comfortable with XRP. There is likely a long road ahead.

On the date of publication, Josh Enomoto held a long position in XRP, BTC and ETH.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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