Ripple lawsuit: SEC lost in XRP even if it is a security, says ex-SEC Grundfest

The former SEC Commissioner was one of the first to criticize the decision to go forward with the XRP lawsuit, having sent a letter to SEC Commissioners three days before the complaint was filed.

The case is at a key moment, with Judge Netburn about to confirm or reconsider her ruling on privileged information after a 180º turn by the SEC, which now states William Hinman’s 2018 speech was public guidance, not a personal opinion. The next ruling is seen as critical for a settlement between both parties or even “complete victory” for Ripple.

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Joseph Grundfest spoke about the XRP lawsuit and the SEC’s decision to go through with it. A move that turned out to be quite unpopular even among SEC officials. Grundfest said he criticized the XRP lawsuit not on the grounds of impropriety but on judgment.

“It is hardly a secret I had questions about the judgment involved in bringing the lawsuit against XRP. I had questions about the timing, implications, policy. Is this a matter that is best addressed from a social perspective by bringing a lawsuit or by saying “let’s look at our regulations”?

“The issue for me is let’s get a system that works and generates compliant crypto, and this lawsuit has a high probability that no matter who wins actually gets us farther away from a good solution”, he said.

Grundfest explained the lose-lose situation: If the SEC wins, “we get a crazy regime where we’ll try to fit square pegs on round holes”; If XRP wins, “then arguably one of the very few cops we have on the beat winds up being weakened…”

“No matter how it turns out, we’re gonna be losers”, he concluded, adding that “if you really care about making the world a better place [..] does this litigation really help us achieve any of these results? Let’s put it this way, I’m not persuaded.”

The general feeling is that the end is near, in regard to the XRP lawsuit, whether by settlement or court decision. When asked about the outcome, Grundfest explained why it will be a complicated issue regardless.

“A lot of public discourse is around the question of whether XRP is a security or not, but there are other issues here that I think are intellectually even more intriguing and may even be more outcome determinative”.

There is a US supreme court opinion that says federal securities laws only apply to transactions that occur in the United States, with one rule of thumb being the transaction closing in the jurisdiction. “If you wind up transacting XRP on a foreign exchange, that’s not in the US, the SEC can’t reach it.”

The issue for the SEC will be to deal with the complexities of the XRP structure, the consensus mechanism, in which an XRP transaction can be closed outside the jurisdiction, whether partially or fully.

“What does it mean to confirm a transaction on a blockchain the way XRP is structured, which is an 80% consensus mechanism?”

The SEC will have to look at the history of the blockhain and figure out who is confirmed and if it can’t determine where this happened, how does it establish where the transaction actually closed?, Grundfest asked. “The burden of proof is on the plaintiff”.

“It may be that even if it is decided this is a security, the SEC may not be able to reach transactions unless they can prove they occurred in the US, and given the architecture of the system, they may not be able to do that”.

In case this is true, the SEC can win the battle and lose the war, he concluded.