The Ripple vs. SEC case, proceeding in a New York court, could decide the future of the crypto industry. The financial watchdog says Ripple’s token XRP is security, while Ripple says otherwise. If the SEC wins, every other token must be considered a security, and this verdict could have disastrous aftermath for an entire industry.
The Ripple vs. SEC case
In December 2020, financial watchdog the US Securities and Exchange Commission charged Ripple, a San Francisco-based company offering cross-border payments, and two executives selling $1.3 billion worth of XRP as unregistered securities. The crypto company has been fighting the allegations ever since.
Both parties have submitted all the documents and testimonies and are now waiting for Analisa Torred, a Judge in the Southern District of New York, to issue a verdict. Some experts say the decision might be around the corner based on her past ruling patterns.
How will the verdict affect the Crypto industry?
The premise of SEC’s allegations was that Ripple’s token XRP be classified as a security or be called something else entirely. If the court calls the token security, this will create a ripple effect affecting all crypto tokens. Crypto firms shall then go through the hassles of registration and reporting requirements.
Moreover, it would create legal consequences for all the crypto entities that have issued tokens or facilitated trading without the consent of the SEC. This would bring some big US-based crypto exchanges into the firing range. Defense lawyer John Deaton, who provided expert testimony on XRP’s behalf, said this verdict would be bad for the industry.
The Howey test for classification
No clear legislation classifies crypto assets in the US. If they are to be treated as securities or otherwise, they must be accessed on a case-by-case basis by applying the Howey test.
The Howey test defined an investment contract as “an investment of money, in a common enterprise, with a reasonable expectation of profits, to be derived from the efforts of others.”
The Bout Between the SEC and Ripple
The SEC argues that XRP is a security as per the Howey Test. Ripple violated federal securities laws by raising funds by selling XRP. However, Ripple is not the issuer of XRP; some of its executives were part of the developing team.
On the other hand, Ripple challenged the SEC’s allegations on two fronts. They argued that selling XRP was not an investment contract, as no contract was signed during transactions. And two, XRP does not qualify the parameters of the Howey test.
SEC Believes the Majority of Cryptocurrencies are Securities
The SEC has long believed that most of the cryptocurrencies circulating in the market are securities. The reason given by them was that people invest with profits in mind. SEC chair, Gary Gensler, said in a September 2022 conference, asked all the crypto businesses to register with them.
Government bodies in the United States have long debated the SEC’s capacity to regulate crypto. However, the financial watchdog has aggressively approached the crypto industry, especially after the FTX-saga. This black-swan event forced the SEC to launch brisk actions against US crypto entities.
Ripple has already announced that it would challenge the decision in the event of a loss. This would push the case in the second circuit and cause more delay. SEC would only argue that the result was an anomaly.
Andrew is a blockchain developer who developed his interest in cryptocurrencies while his post-graduation. He is a keen observer of details and shares his passion for writing along with being a developer. His backend knowledge about blockchain helps him give a unique perspective to his writing
Source: https://www.thecoinrepublic.com/2023/03/22/future-of-the-crypto-industry-is-getting-decided-in-a-ny-court/