What Was the SEC v. Ripple Lawsuit?
SEC v. Ripple was a court case in the United States Southern District Court of New York. In 2020, the U.S. Securities and Exchange Commission (SEC) alleged that Ripple, the blockchain developer and creator of the XRP cryptocurrency token, raised more than $1.3 billion in 2013 by selling XRP in an unregistered security offering to investors.Ripple, relying on the previous comments of an SEC director to support its case, argued that XRP should not be treated as a security.
On July 13, 2023, the court found that XRP (and thus cryptocurrency) was not a security when sold to the public on an exchange, but it is when sold to institutional investors.
Key Takeaways
- Ripple Labs is a blockchain developer and the creator of the XRP token.
- The SEC accused Ripple of selling XRP in an unregistered security offering.
- The outcome of the U.S. regulator’s court case against Ripple might still have far-reaching consequences for the cryptocurrency industry.
- Ripple emerged somewhat victorious in this court case, and two defendants await trial and final judgments on aiding and abetting the offerings.
Why Is the SEC v. Ripple Case Important?
The SEC v. Ripple case sent shockwaves through the cryptocurrency sector when blockchain projects had been operating with little regulatory oversight. There had been fears of future regulatory action, but this was the most high-profile example of a securities regulator targeting an initial coin offering (ICO).
Both parties were partially victorious—the SEC emerged with authority over sales to institutions, and exchanges can allow cryptocurrency trades as the decision supports the view that cryptocurrency transactions on exchanges are not securities transactions.
Understanding the SEC’s Ripple Lawsuit
The SEC charged Ripple—and two of its executives, Brad Garlinghouse and Christian Larsen—with selling unregulated securities valued at more than $1.3 billion to the public over the years via their company-offered XRP.
At one time, it was commonplace for cryptocurrency projects to fund their staffing and operations by selling their tokens, while executives also benefited from cash sums.
The SEC said Ripple never filed a registration document, which is a requirement for companies in the stock market when they are seeking to raise capital from the public. The regulator complained in the lawsuit that Ripple had "created an information vacuum" and only shared information that it felt necessary.
The outcome has significant implications for both parties and the broader crypto market. The SEC wants to bring the cryptocurrency industry under its regulatory umbrella, so the partial win against Ripple may be what's needed to start the ball rolling. Garlinghouse and Larsen await the jury's decision on their degree of liability for violating securities laws.
What Are Ripple and XRP?
Ripple Labs was founded in 2012 as OpenCoin, but later changed its name and launched the XRP token. At the time, there were fewer cryptocurrencies, so with its ample coin supply and fast transaction speeds, XRP was seen as a new solution for cross-border remittances.
The XRP token grew from millions to billions in terms of market capitalization in 2017, with continued growth in the following years. However, once the SEC filed suit in December 2020, crypto exchanges such as Coinbase suspended trading in XRP, adding to the negative sentiment surrounding the coin.
The timing for Ripple Labs was terrible. The suit was filed just ahead of the largest bull market in cryptocurrency history—when Bitcoin (BTC) eventually soared to highs above $64,000 per token in 2021. XRP’s price remained depressed throughout that rally, with investors spooked by the SEC court case’s outcome.
What Is the Howey Test?
The Howey Test refers to the U.S. Supreme Court case (SEC v. Howey) that set a precedent for determining whether a transaction is deemed an "investment contract." If it meets the criteria, it is considered a security under the Securities Act of 1933and theSecurities Exchange Act of 1934. Notably, an investment contract exists if there is an "investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others."
Is XRP a Security?
Based on the Howey Test and the court decision in SEC v. Ripple, XRP—and thus cryptocurrencies in general—are securities when they are offered to institutional investors. When they are sold on exchanges to retail investors, they are not.
Will Other Cryptos Be Classed as Securities?
The SEC's partial win against Ripple could open the floodgates to further action against crypto creators.
The Bottom Line
The result of the SEC v. Ripple lawsuit could still change the regulatory outlook for the entire crypto industry because there is a chance for it to appeal the decision. It is clear that the SEC is looking out for individual investors by bringing cases against organizations that offer crypto as investment contracts—what isn't yet clear is whether the judgment will stick and how future complaints against cryptocurrency companies will pan out.
The comments, opinions, and analyses expressed on Investopedia are for informational purposes online. Read ourwarranty and liability disclaimerfor more info. As of the date this article was written, the author does not own cryptocurrency.
