SEC Motion in Ripple Case Denied

The final ruling in the suit will have enormous ramifications across the crypto regulatory landscape, meaning this small victory is key for the industry.

Ripple Versus the SEC

Ripple scored another small victory in its legal battle against the Securities and Exchange Commission (SEC). The Magistrate, Sarah Netburn ruled that the ‘attorney-client’ privilege was not waived by Ripple when it raised the defense of Fair Notice. 

The Magistrate decisively ruled on a motion that was filed by the SEC to compel Ripple to produce the memos discussing XRP’s sales with its counsels. The motion was filed on May 7., 2021 by SEC requiring Ripple to produce communications with its lawyers regarding the sales of XRP token and whether they were advised that such a conduct falls within Federal Securities Law. 

Significance of the Suit 

The ongoing case of SEC v Ripple Labs Inc has garnered a lot of attention from the crypto community. It is a landmark case for a few reasons. First, this case will likely set the precedent as to whether all tokens are classified as securities. Secondly, can the Securities and Exchange Commission exercise its jurisdiction over a crypto asset that has been openly traded and listed on exchanges in the United States? It is difficult to put the cat back in the bag once it has tasted freedom, and the ramifications of the case will be interesting no matter who prevails. 

What the Case is All About

Christian Larsen, Ripple’s co-founder, and its current Chief Executive Officer (CEO), Brad Garlinghouse, were jointly sued with Ripple in December 22, 2020. This suit has raised eyebrows because the Trump administration had decided to institute an action towards the end of his tenure as the President of America. This is particularly a contentious move because if XRP has long been recognized as a security as claimed by the SEC, this token has been openly traded in licensed exchanges from its inception in 2013. There has been an inordinate delay to take action, and that delay will cause tremendous consternation if the ruling goes against Ripple. This is the crux of the defense of Fair Notice that Ripple will be relying on, which gives them a solid basis for their legal argument. 

Putting the SEC on Trial 

The pressure has been mounting on the SEC to clarify its position on the existing regulatory framework. To seize jurisdiction over Ripple and XRP, the first hurdle that SEC must satisfy is to prove that XRP is a security. XRP has also been described as a ‘convertible virtual currency’ by a U.S. government agency. In early April, 2021, Ripple in its motion for discovery was granted by the Magistrate to allow access to SEC’s documents. The purpose is to shed light on the agency’s interpretation and view of XRP, in order to see if their case is justifiable based on previous interpretation. 

If the preliminary issue raised by Ripple is successful, the SEC will be embarrassed. This decision will require the SEC to set a more comprehensive framework that will assist the parties that are potentially bound by the regulation to be aware and make the necessary adjustments. 

Gary Gensler, the SEC Chair has not expressed any opinion on the ongoing matter but suggestions from the attorneys for Ripple hints of a possible settlement with conditions attached. 

What to Expect After Ripple’s Case

This suit will shape the regulatory framework for the future, meaning it is vitally important investors follow the results of the case. What we have seen thus far is the arbitrary action by the SEC to its enforcement, which does not bode well for the industry. If indeed investor’s protection is the key factor that led to SEC’s suit against Ripple, it presupposes that the regulator has been oblivious to the same risks that exist since 2013. 

One of the hallmarks of a fair and equitable regulatory framework is the ability to prescribe compliance to the players that wish to operate within the regulation. Many that are not familiar with securities law will be left wondering why Bitcoin and Ethereum have been classified as commodities, which has been confirmed by Heath Tarbert, the Chairman of the Commodity Futures Trading Commission (CFTC). Surprisingly, Tarbert was unable to affirmatively confirm if XRP could be classified as a commodity or security. If a person of Tarbert’s experience and stature is unable to identify the status of XRP with certainty, the regulator cannot say that Ripple should have known better. Whatever the outcome of this suit, the SEC has identified one pressing need for the industry to move forward, which is regulatory clarity.

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