What does the lawsuit consist of?

061 – On December 19, 2020, it was announced that the SEC would sue Ripple alleging that the XRP token, which was issued by Ripple, was an unregistered security in the United States and was being sold illegally.

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The lawsuit extended to Ripple’s CEO and co-founder, as the SEC found that all parties involved engaged in malpractice in order to benefit monetarily, despite not being properly licensed by the SEC.

The million-dollar question is, why did the SEC consider XRP a stock and not just a digital asset? And in a way it all comes down to the Howey Test, which is a very simple practice that goes some way to determining whether an asset is a stock or not.

The Howey Test seeks to answer the following question: Does the stock’s value depend on the participation of a third party? In the case of shares the answer is clear, since the value of the shares depends on the financial results of the company and its growth, in addition to external factors that are outside the main premise. While in the case of XRP they indicated that it did depend on a third party, since in this case it depended on Ripple and the results obtained from the various projects it would initiate from the issuance of the XRP token.

Similarity of the stocks to the XRP token

To understand the context, it is necessary to know what stocks are and how they are treated in the United States. Stocks are a property right or part of the value of a company or entity, the most common cases are stocks or bonds issued by companies and even governmental entities.

In fact, the basic principle of both largely coincides, and that is that the securities are a part of the company that is in the hands of the public, therefore, the shareholders or debt holders own a portion of the company.

Tokens are issued through an Initial Coin Offering (ICO), which seeks to raise capital and offers investors a project that will be created with the capital obtained, in other words, debt is issued to raise seed capital.

Therefore, upon completion of the project and if successful, the token will increase in value and will have a behavior similar to that of shares in the traditional stock market. This is the reason for the SEC’s strong response to this type of instruments, since, since there is no legislation for cryptocurrencies and their derivatives, the legal loopholes that are in the air can be interpreted in one way or another depending on the context in which they are developed.

Outcome of the trial

Last July 13, Judge Analisa Torres released the initial verdict on the XRP case after years of tension, in which he ruled partially in favor of Ripple Labs, arguing that the issuance of the XRP token is not considered an asset, only when it is made through the sale of digital assets on exchanges.

However, the SEC also won its own victory, as the judge mentioned that it can be considered an asset when the token is sold to institutional investors, as it meets the basic criteria of the Howey Test.

Both parties succeeded in obtaining a partial “victory” in their favor, but the truth is that the news was very well received by investors in the crypto ecosystem, as the XRP token went from trading at USD$0.45 to USD$0.70, marking an increase of more than 55% in a matter of hours.

Undoubtedly, the outcome of this trial marks a milestone in favor of cryptocurrencies, because many cryptocurrencies and various digital assets that have been around the controversies, could be benefited and not be classified as assets. Although it is also clear that the time of sale and marketing that has been used and will be used in future issues will set the tone on whether they can be considered as assets or not.

As previously mentioned, there are currently several legal loopholes regarding the classification of cryptocurrencies and how they should be treated under the law, so in order to see harmony between regulators and the world of cryptocurrencies, a definitive consensus will have to be reached regarding the definition and classification of cryptocurrencies and their derivatives.

Despite the still existing doubts, the partial ruling in favor of Ripple and the XRP token may lead the way to other projects and thus generate a domino effect, but in this case in a positive way, not only for cryptos, but for all parties involved.

However, even though a “union” or “pacification” is expected between the SEC and cryptocurrencies, there is something very important to highlight, the main purpose of cryptos is to have a decentralized scheme, so the question arises as to why the SEC’s “blessing” is needed? Doesn’t it go against the main purpose?

While it is good that the war between the parties is coming to an end, doubts may arise and the innovation and potential of cryptocurrencies and blockchain technology may be affected by the new agreements and laws. It remains to be seen under what conditions the various exchanges will negotiate, but there will undoubtedly be many controversies involved.