You may have seen it more than once; the lawsuit against Ripple. In 2020, the United States Securities and Exchange Commission (SEC) filed a lawsuit against Ripple Labs and its current and previous CEOs. Usually, the SEC settles its lawsuits. Unlike many others, Ripple decided to take on the legal battle with the SEC. We often notice that there is a lack of clarity about what exactly the lawsuit is about. We hope to change that with today’s deep-dive.
Ripple Labs
Ripple Labs was founded in 2012 with the aim of providing financial institutions with fast and cheap international transactions. To make this possible, the company created the RippleNet network. Transactions take place on this using the cryptocurrency called Ripple (XRP). The network went live in August 2013.
The accusation
It all starts with the SEC claiming that XRP is, in English terms, a “security”. A security is a financial instrument that represents ownership in a company, but has no other use. According to SEC, the problem with Ripple is that XRP coins have actually been used to fund the Ripple platform.
Securities are subject to certain laws. The SEC alleges Ripple Labs executives held a registered Initial Public Offering (IPO). An IPO is an IPO. In an IPO, a private company lists its shares on an exchange, making them available for purchase by the general public. According to the complaint, Ripple raised money specifically by selling XRP coins unregistered. In addition, Ripple offered billions of XRP in exchange for labor.
According to the lawsuit, Chris Larsen, co-founder and former CEO of Ripple Lab, and Brad Garlinghouse, Ripple’s current CEO, contributed $600 million in unrecorded XRP transactions. This income was used to support the company’s operations.
Ripple’s defense
Ripple’s lawyers claim that the SEC never notified the company that XRP is securities. As a result, Ripple believes that the SEC was biased in applying the security concept to virtual currencies such as XRP. If this turns out to be true, the committee’s authority will be weakened, not to mention the credibility of its arguments.
Ripple Labs claims that some of SEC members are connected to other crypto platforms such as Ethereum. While there is currently no evidence of this, the commission gave Ethereum a pass on security regulations because it operates in a decentralized manner. They do sue XRP and Ripple Labs finds that suspicious.
The Future of Ripple
The court rulings appear to have been in favor of Ripple so far. On February 23, 2022, the letter was filed with the court, stating that the class action case was to begin on August 26, 2022, but that the parties have agreed to begin on November 18, 2022 in preparation for the factual and legal questions.
It’s hard to determine who the SEC vs. Ripple case will win. In terms of procedural considerations, both Ripple Labs and the SEC seem to have a pinch of success in their own right. Ripple, for example, successfully forced the SEC to file papers, while the SEC managed to get a deferment.
The conclusions of the lawsuit against Ripple vs. SEC concern more than just the Ripple community. Aside from XRP holders, the case could send a powerful message to everyone participating in the crypto industry, including the exchanges, investors, and traders. Depending on the country, the decision of the lawsuit can have different consequences.
The United States, on the other hand, would have a unique status for crypto with the final outcome of the case. The crypto community is especially optimistic about the Ripple vs. SEC litigation, where most people believe Ripple Labs has a better chance of winning than the SEC. Nevertheless, existing XRP holders are most concerned about what could happen to the XRP token price if Ripple loses the case.
For now it is an impasse. But if history is any guide, the SEC faces a difficult task. To date, no company has regulated their crypto tokens as securities as required by the SEC.
Data analysis of XRP
Ripple’s long-running lawsuit with the SEC, in this section we take a look at XRP’s on-chain and public data and examine the fundamentals of the network.
Figure 1 shows how the number of active addresses on the network has developed over the past 5 years. The amount of active addresses is an indication of usage and partly trust in the network. If a network is used a lot, this says something about the value that this network provides for users and will lead to more demand for the token. Currently, there are almost 55,000 addresses on the XRP network that are active on a daily basis. At the peak in July, we still saw more than 270,000 active addresses. It is clear that activity on the network has dropped considerably since the price crash in the overall crypto market. Currently, activity seems to be fairly stable at around 50,000.