The SEC versus Ripple Labs—XRP’s Fight Against Administrative Overreach

It’s been nearly 20 months since the Securities and Exchange Commission (SEC) sued Ripple Labs for selling XRP as unregistered securities. John Deaton, who represents Ripple in the SEC vs. Ripple Labs court case battle, believes there’s major evidence of overreach by the SEC.

In December 2020, the Ripple case was launched by Jay Clayton, then-chairman of the SEC, which is now being led by Gary Gensler. Gary Gensler recently wrote on Twitter that “there’s no reason to treat the crypto market differently from the rest of the capital markets just because it uses a different technology.” John Deaton responded to the tweet by claiming Gensler is expanding the “Howey Test” beyond recognition, in reference to the U.S. Supreme Court case that determines whether a transaction qualifies as an “investment contract.”

Classifying XRP as an investment contract would therefore deem XRP a security, which would result in disclosures, registration requirements, and an overall much stricter regulatory scrutiny process for Ripple.

The lawsuit charges Ripple and two executives for selling $1.3 billion worth of securities. The accusation alleges that in the beginning of 2013, CEO Brad Garlinghouse and co-founder Christian Larsen raised capital to finance the company’s finances and exchanged XRP for non-cash considerations.

In short, the SEC alleges that Ripple was treating XRP like a stock instead of a currency; therefore, the SEC claims it has jurisdiction.

Ripple Labs aims to assist financial institutions and payment providers to move money quickly and at low cost, which would entail replacing the current SWIFT system if widespread adoption was initiated. The Society for Worldwide Interbank Financial Telecommunications (SWIFT) banking method is the primary form of transferring money by institutions, which account for nearly half of all international wires. SWIFT moves $5 trillion each day, but can take several business days to fully complete transfers.

Ripple is separate from XRP. XRP is the cryptocurrency representing Ripple Labs to facilitate the transfers. Unlike the SWIFT system, XRP’s settlement speeds range from three to five seconds. Users would be able to convert their fiat currency into XRP, and then easily convert it back to the preferred fiat currency. XRP can handle up to 1,500 transactions per second, with a potential to eventually match Visa’s transaction level of 6,000 transactions per second.

XRP has a finite supply of 100 billion units, which were all fully created at the time of inception of the cryptocurrency. There are roughly 45 billion XRP in circulation, with a majority of the XRP tokens owned by RippleLabs and Ripple owners, while a large percentage of the XRP supply is sitting in escrow.

During a hearing of the SEC vs. Ripple court case early in the year, it was suggested that XRP has a currency value along with a utility that differs from cryptocurrencies like Bitcoin and Ethereum. XRP’s market capitalization sits in the top 10, among the likes of Bitcoin and Ethereum. Unlike XRP, Bitcoin struggles to hold as a utility other than being a storage of value. Ethereum offers decentralized applications as its currency through smart contracts. XRP holds the edge over Ethereum and Bitcoin in terms of transaction speed and associated fees, which is crucial for what Ripple is looking to address, which is mass adoption of cross-border transactions in nearly real-time speeds.

The SEC vs. Ripple lawsuit is an important lawsuit because the verdict can set the precedence for all cryptocurrencies. If XRP is classified as a security, all other cryptocurrencies will also be deemed “unregistered securities” by the SEC.

John Deaton and the 72,000 XRP holders feel confident a verdict will be made by the end of the year that will favor Ripple. At the time of writing, the XRP price is sitting at $0.34, which is 90 percent below from its all-time high back in early 2018. Once the SEC lawsuit ends, CEO Brad Garlinghouse fully plans on taking Ripple public with an initial public offering.

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