Ripple: Judge gives SEC order

There was a small victory yesterday for Ripple in the ongoing court proceedings after the lawsuit filed by the SEC. 

In fact, U.S. District Judge Analisa Torres ordered the SEC to produce documents regarding a 2018 speech by former director William Hinman, as requested by Ripple. 

In fact, such a request had been issued earlier, but the SEC had appealed. Now that it has lost the appeal, it will be obliged to produce them. 

Former director William Hinman’s 2018 speech is not fully public because only excerpts of it have been published, but from them, it is already clear where he stands. 

He said, regarding ICOs: 

“The same reasoning applies to digital assets. The digital asset itself is simply code. But the way it is sold – as part of an investment; to non-users; by promoters to develop the enterprise – can be, and, in that context, most often is, a security – because it evidences an investment contract.” 

The problem is that this does not seem to have matched the agency’s public position, which may allow Ripple to raise some objections to the lawsuit and accuse some of its accusers. 

Ripple ever closer to victory against SEC

Hinman was director of the SEC’s Division of Corporation Finance from May 2017 to December 2020, the same month the lawsuit against Ripple was announced. 

The division he headed also has, among other duties, to provide interpretive assistance concerning SEC rules, so his opinion regarding which cryptocurrencies should be considered a security is relevant. 

The current chairman, Gary Gensler, appointed in April last year, has a broader view of what should be considered a security, but the rules over time may not change. 

It is possible, therefore, that the SEC has changed its approach over the years, in part because just at the end of 2020, a new U.S. president, Joe Biden, was elected, who a few months later nominated Gary Gensler to the SEC chairmanship in place of predecessor Jay Clayton appointed by Trump. 

The case against Ripple was initiated under Clayton’s chairmanship, but perhaps not coincidentally, just as Hinman stopped being director of the Division of Corporation Finance. 

Ripple asked the court for the SEC to produce documentation of Hinman’s 2018 speech, but the SEC refused. Now, with Judge Torres’ explicit order, it will have no choice but to submit that documentation to the court and the defendant, namely Ripple. 

The price of Ripple (XRP)

Today the price of XRP on the cryptocurrency markets benefited in no small measure from this news, gaining about 12 %. Over the day, however, it lost some of what it gained overnight but remained around $0.49. 

That’s an interesting level because it is well above the $0.3 touched in June. It is also even more interesting because it is in line with the price level before the implosion of the Terra ecosystem in mid-May. XRP, for now, is the only major cryptocurrency to return to pre-mid-May levels. 

It should be mentioned, however, that since this lawsuit has been underway, namely December 2020, the price trend of XRP has been different from that of the other major cryptocurrencies, precisely because of the continuous news coming from the evolution of the court case. 

Particularly among the major cryptocurrencies, XRP has been the only one during the 2021 bullrun that has failed to make new all-time highs, as the $3.4 of January 2018 is still undefeated. 

However, yesterday’s victory for Ripple is only a small partial victory, although it does cast some optimism on the future of this cause. 

Note that starting on September 16, the price of XRP began a very interesting climb indeed, which still seems to be ongoing, thanks to which it went from $0.32 to $0.49 in two weeks. 

Likely, this rise is primarily due to the spread of some enthusiasm toward the possible outcome of the ongoing lawsuit. 

Indeed, some argue that if in nearly two years, the SEC, which is the U.S. government agency charged with overseeing the security market, has failed to prove that XRP is a security, then it simply may not be able to do so again. 

This assumption may not necessarily turn out to be correct, but at least it seems more than logical. Not least because the new SEC chairman claims that many cryptocurrencies are to be considered a security, so in theory, he should already have evidence of this. 

Moreover, XRP, which was formerly called Ripple after the company, is a cryptocurrency that a private, centralized company issued, so it is much more likely to be a security than a decentralized cryptocurrency. 

Is XRP a security? 

It should be remembered that the key point in determining whether a financial asset is to be considered a security is, as the Howey test states, whether it is sold with the promise of generating a gain due only to the efforts of a third party, i.e., not the buyer. 

In fact, to date, XRP is not sold with promises of earnings because it is only the utility token of cryptocurrency services provided by the company Ripple. Still, according to the SEC, until a few years ago, the same company was selling it promising earnings. Those who bought it apparently expected that thanks to the efforts of the Ripple company, they would make money from it. 

So the issue should not be about the current state but what was done in past years when Ripple used the sale of XRP to raise capital. 

Should the SEC lose against Ripple, it will presumably be very difficult to argue that other cryptocurrencies should be considered a security, not least because since many of them are decentralized, they are not being sold by an entity promising profits. 

What Hinman said in 2018 seems to be in perfect agreement with this approach, i.e., XRP should not be considered a security per se, but at most, the public offering made initially by Ripple can be considered a sale of unregistered securities. 

That would imply that cryptocurrencies as such should not generally be considered securities, but only that those who sell them in the market may have to be subject to the same rules that apply to those who sell securities, i.e., investment contracts. 

Instead, the SEC’s current position would seem to be that it considers many cryptocurrencies to be securities regardless of how they are put on the market, and this can be seen as a contradiction. 

Ripple probably wants to take advantage of this apparent contradiction to discredit the SEC’s legal action against it, and if it succeeds, the SEC’s approach to cryptocurrencies should change. 

Note that Bitcoin, on the other hand, is now clearly considered a commodity, such that it should be the CFTC and not the SEC that oversees its market.