A lawsuit was filed in December by the US Securities and Exchange Commission (SEC), against XRP custodian Ripple, it’s CEO Brad Garlinghouse and President Chris Larsen. The lawsuit hinges on the classification of XRP as a security (i.e. a financial asset from the investor intends to profit) as opposed to a currency or medium of exchange. The SEC claims the sale of XRP amounted to a violation of federal securities law, because Ripple failed to properly classify its product and, by extension, provide sufficient information to investors.
The US Securities and Exchange Commission’s (SEC) lawsuit against Ripple Labs has massively hurt XRP investors. After the lawsuit was announced shortly before Christmas, the XRP price crashed by more than half. Even though the price has shown some recovery since then, the ongoing negative headlines about delistings are depressing the market sentiment around XRP.
While other altcoins such as Cardano or Polkadot have been posting triple-digit gains in recent weeks, XRP is currently bobbing around below the $0.30 mark. Polkadot (DOT) has already overtaken XRP by market cap, and Cardano (ADA) is on the verge of doing so. However, the pendulum may swing once the SEC lawsuit is shelved.
Traders must learn the investment wisdom of “not following the crowd” or trading against the psychology of the crowd, there may be a massive price increase as soon as Ripple settles or wins the lawsuit with the SEC.
We must remember the excellent performance of the KIN token after Kik survived its battle against the SEC. After the conclusion of the legal battle with the SEC, which won the case and allowed the token to be classified as a security, KIN experienced a roughly 2,000% price increase.
If Ripple is victorious in court, all exchanges that suspended trading of XRP are expected to reverse their decisions. Since XRP was traded on many more exchanges than KIN, the effect could be even greater.
Possibly solution to Ripple and XRP lawsuit
The U.S. Securities and Exchange Commission’s (SEC) lawsuit against Ripple Labs has cast a shadow of uncertainty to the crypto industry. The regulator is accusing the payment solutions company of making an unregistered sale of a security, the XRP token. However, Ripple is defending itself ahead of the pretrial conference scheduled for February 22.
A Yahoo! Finance report explores possible arguments that Ripple can use to counter the SEC’s allegations. The report cites sources close to the payment solutions company’s legal strategy and establishes the performance of XRP’s price as a central line of argument.
According to 8 years of data, the price of XRP has not changed in relation to news events related to Ripple partnerships. As an example, the report states that the announcement of the cooperation between Ripple and MoneyGram brought benefits to the actions of this second entity, but did not have an apparent positive impact on XRP.
By comparison, MoneyGram shares increased 170% in 24 hours after that announcement and XRP remained “flat”. However, CoinMarketCap data cited in the report indicates that there was a 15% increase in XRP’s price. With this argument, Ripple seeks to establish that there is no relationship or benefit between the company and the token that they classify as a decentralized asset.
The SEC may counter that Ripple may have marketed XRP in such a way that investors associated the company’s success with the token. In that regard, the report states that after its registration, Ripple referred to XRP as “ripples”. The source cited classifies this as “a red herring” and considers it unfair that the lawsuit was filed in the current political situation in the United States.
SEC relies on ICO precedent to sue Ripple
In theory, the SEC’s strongest argument is the precedents set by the lawsuits against the Initial Coins Offers (ICOs) of companies such as Telegram, AirFox, Paragon, and others. Ripple could argue that its business model is based on offering solutions to facilitate payments with a global customer base of over 500 entities and companies, not in selling XRP.
In that regard, the “Howey Test” will be key to proving whether XRP qualifies as a security under U.S. law. This instrument allows the SEC to determine whether an investment derives its value from the allocation of funds “made in a company with an expectation of profit from the efforts” of a third party. On this, Ripple has stated the following:
The SEC’s theory, that XRP is an investment contract, is wrong on the facts (…) amounts to an unprecedented and ill-conceived expansion of the Howey test and the SEC’s enforcement authority against digital assets.
In addition, the payment solutions company is relying on a U.S. Supreme Court decision that ruled that the Howey Test must be “flexible rather than static” and adaptable to the various new “schemes” and markets. For the time being, the regulator considers that XRP does not pass that “flexibility” test.
What if Ripple and XRP survive this lawsuit?