A lawsuit filed by the US Securities and Exchange Commission (SEC) against Ripple caused market turmoil. Ripple XRP fell by more than 50% in the next two days.
All the allegations revolve around a core issue, that is, the SEC defines XRP as an “investment contract” and belongs to securities. Ripple and the two executives did not register for securities issuance with regulatory authorities, nor did they disclose the company’s business model, risks, and financial status to the SEC and the public.
However, Ripple maintains that XRP is a currency like BTC and ETH, which were previously deemed not to be securities.
In the US regulatory system, the Howey Test is the key to determining whether a certain encrypted asset is a security. Generally, a centralized individual or organization behind a certain encrypted asset may be regarded as a security. SEC officials have stated that BTC and ETH are not classified as securities, mainly because of their decentralization.
According to Gu Yanxi, a blockchain and encrypted asset researcher, the SEC’s lawsuit against Ripple is intended to eliminate regulatory uncertainty. In the long run, regardless of the final judgment, the court case between the SEC and Ripple may bring a typical case to provide reference value for industry practitioners.
XRP fell into a “securities” crisis, plummeting 50% in two days
Ripple, hailed as a rich myth by investors in the crypto asset circle, still has to face the crisis brought about by securities.
On December 23, the US Securities and Exchange Commission (SEC) announced a lawsuit against Ripple and its CEO Brad Garlinghouse and co-founder Christian Larsen, accusing them of passing a lawsuit An unregistered, ongoing digital asset securities offering has raised more than $1.3 billion.
In the lengthy indictment, the SEC listed Ripple’s multiple “crimes.” The SEC alleged that Ripple has made a profit of US$1.38 billion by selling 14.6 billion XRP since 2013. This kind of unregistered securities issuance violates the relevant provisions of the Federal Securities Act. In addition, Ripple has an internal trading team that uses algorithms to formulate strategies such as the price and quantity of XRP, which violated the Investor Protection Law when selling XRP.
All the allegations are almost centered on a core issue, that is, the SEC defines XRP as an “investment contract.” According to the Securities Act of 1933 and the Securities Exchange Act of 1934 in the United States, transactions that meet the conditions of an “investment contract” are considered “securities” and need to be registered with the regulatory authorities, and the company’s business is disclosed to the SEC and the public Model, risk and financial situation. The SEC alleged that Ripple had not obtained a securities license for many years.
Once this news was fermented, it immediately triggered XRP to dive into the secondary market. It went all the way down from the opening price of $0.48 on December 23, and fell to a minimum of $0.21 on the morning of December 24, falling by more than 50% in just two days. Ripple’s plunge has affected the market trend to a certain extent, and mainstream currencies such as ETH and BCH have also fallen by more than 10%.
In the current crisis, Ripple CEO Brad Garlinghouse stated to the outside that the SEC is wrong in terms of law and facts. He said on December 23 that after reviewing the SEC lawsuit, he was confident of winning the case. Because XRP, as the third largest virtual currency, is not an investment contract like BTC and ETH recognized by the SEC.
Brad Garlinghouse also complained that the U.S. regulation of cryptocurrencies lacks transparency, and the SEC has been sitting idly by for years. In fact, as to why Ripple is a currency and not a security, “We have discussed with the SEC for nearly 3 years, but have not received a clear answer, but we have already explained it.”
Although Ripple said that it was true to its heart, the SEC’s intervention has allowed the situation to develop in an uncontrollable direction.
According to The Block report, after the SEC filed a lawsuit against Ripple, high-frequency traders Jump Trading and Galaxy Digital have stopped making XRP markets; at the same time, the encrypted payment processor Simplex has also banned XRP transactions. Cryptocurrency fund management company Bitwise Asset Management announced that its Bitwise 10 crypto index fund (OTCQX code BITW) has liquidated XRP positions.
On December 24, Adam Cochran, a partner of Metacartel Ventures, also revealed on the social platform that the Coinbase exchange is likely to delist XRP.
If the mainstream trading platform under this regulatory framework voluntarily delists XRP, it may cause the asset to fall further. Messari CEO Ryan Selkis pessimistically predicted that XRP will fall below $0.1 by mid-January.
Regulatory uncertainty to be eliminated
In this lawsuit, the biggest dispute is whether XRP belongs to the category of securities.
Compound general counsel Jake Chervinsky believes that the worst case Ripple faces is securities fraud. If XRP is considered a security, XRP may not be used, and violations of regulations are fatal to Ripple. The SEC’s The attitude is very tough. If the lawsuit is successful, XRP will face suspension, transfers or withdrawals will not be executed, and the exchange may delist XRP to avoid risks.
In the US regulatory system, judging whether an encrypted asset should be classified as a security usually depends on the score of the Howey Test. The higher the score, the more likely it is to be recognized as a security.
Howey Test’s score is mainly related to 4 elements: capital investment, investment in a common cause, expectation of profit, and not directly involved in the operation, only relying on the efforts of the initiator or a third party to make profits. If you substitute Tesla stock, you will find that it fully meets the above four conditions, and Tesla stock is indeed a security.
As early as 2018, SEC official William Hinman publicly stated that BTC and ETH do not belong to the category of securities because they are decentralized and there is no centralized third party to operate the asset. However, some cryptocurrencies are securities, and the SEC will use relevant securities laws to supervise these digital cryptocurrencies that are securities.
It seems that when the SEC divides securities, it will determine whether there is an individual or organization behind an encrypted asset to support the issuance and sale of the asset. If it is a centralized operation, it is likely to be regarded as a security. And as the outside world is well-known, XRP is issued and operated by Ripple, which is the core point of the SEC’s lawsuit against it.
In fact, in 2019, the SEC also sued the social software Kik for illegally issuing digital currency securities. The company issued KIN tokens and raised funds from the American people. In October of this year, the SEC announced the termination of the lawsuit against Kik. According to the judgment, Kik will be required to pay a fine of 5 million U.S. dollars to the SEC and submit a notice to the SEC on any funding situation in the next three years.
Although the SEC has always stated that it hopes to regulate the encrypted asset industry, judging from past cases, there is still a lot of uncertainty about the scale of supervision. You know, XRP was issued in 2011. Since 2017, whether it is a currency or a security has been in dispute. It was only recently that it was brought to court by the SEC.
In the view of Gu Yanxi, a researcher on blockchain and encrypted assets, the SEC’s lawsuit against Ripple is expected. It is intended to eliminate regulatory uncertainty, which will help encrypted digital finance in a more regulated scope. development of.
Gu Yanxi believes that the SEC is taking a systematic approach to resolve non-compliant projects in the market. Since the attributes of cryptocurrencies such as XRP have not been clearly expressed by regulatory agencies, various innovations in this area in the market are at risk of violations. Now that the SEC has stated its position will help reduce uncertainty.
Behind Ripple’s prosecution, the more far-reaching significance is that both the regulatory authorities and the encrypted asset industry will have more clarity on relevant laws. This has also triggered some discussions. Messari founder Ryan Selkis believes that this case will show that Howey Test is seriously outdated in the digital age. He hopes that Ripple will eventually win the lawsuit. This will encourage innovation and push the US’s supervision of the encryption industry forward. development of. OKEx CEO Jay said that the announcement that XRP is a security or will allow Ripple to be listed on a traditional stock exchange may open it to a wider market.
Whether the “trapped beast” Ripple, who is trapped in the securities dispute, can escape from supervision is yet to be determined. However, regardless of the final judgment, the court case between the SEC and Ripple may bring a typical case to provide reference value for industry practitioners.