Ripple v SEC
If you’re a fan of legal drama, you would definitely appreciate what’s happening now between Ripple and the SEC. If you’re not, you should still keep an eye on it, as an important precedent in crypto law is about to be set.
In December’20 the American Securities and Exchange Commission filed a lawsuit against Ripple, the company behind Ripple blockchain and XRP cryptocurrency, alleging that it released over $1.3 Bn worth of unlicensed securities to the public. The securities in question are the XRP coins that had the misfortune of being entirely pre-mined in 2012.
Ripple insisted that they never sold XRPs as part of a contract for an investment: Ripple Labs company was founded after the XRPs were pre-mined and was given 80% of the coins to finance the development of a Ripple-based payment software.
Unlike Bitcoin, which was created as a new money, Ripple’s goal is to use the blockchain to the profit of the existing financial system and to facilitate fiat money movements between financial institutions around the world. Ripple’s network of institutional payment providers acts as a base for several cross-border payment solutions, one of which (xRapid) uses XRP coin. This would make XRP a commodity or a means of exchange, but not a security.
These considerations did not impress the SEC, and the legal war began. Little did they know that it would cause a backlash so harsh that the SEC’s own integrity would be put under scrutiny.
Keeping priorities straight
As stated on their website, “The mission of the SEC is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. The SEC strives to promote a market environment that is worthy of the public's trust”.
The initial statement about Ripple continued this line, pointing out that the company "failed to register their ongoing offer and sale of billions of XRP to retail investors, which deprived potential purchasers of adequate disclosures about XRP and Ripple's business and other important long-standing protections that are fundamental to our robust public market system”. The SEC’s actions, however, are proving that the public market and investor protection are by far the last of its preoccupations.
Robust public market? The SEC failed to give fair notice to market participants about which cryptoasset they would consider an investment contract under the law. By the time they decided that XRPs were securities, the coins have been traded for over 8 years, and their 24h trading volume at the time of writing is almost $4 Bn. A robust market can’t operate in fear that a regulator would wake up one day and decide that a massively traded asset should be treated in a completely different manner. That’s definitely not worthy of a public trust.
Investor protection? The lawsuit surely had an impact on the XRP price, and the coin itself was quickly delisted from Coinbase, US leading exchange. In April, a Rhode Island lawyer John E. Deaton filed a Motion to Intervene on behalf of over 10’000 XRP holders “who suffered collateral damage from [the SEC’s] ill-conceived lawsuit” and are seeking to participate in it. The SEC fiercely opposed it, arguing that retail holders’ interests are amply represented by the defendant, which means that investors are SEC’s adversaries in this case.
Ripple strikes back
Despite being actively contested by the SEC, in July the Court authorised the deposition of its ex-commissioner William Hinman, who famously mentioned in 2018 that ETH was not a security, despite Ethereum having an unregistered ICO 4 years earlier. Not only this statement points out the unequal treatment of two cryptocurrencies, but it raises serious issues of the SEC’s integrity. Mr Hinman, it appeared, has collected over $15M in payments from Ethereum-connected firm Simpson Thatcher during his service at the SEC, and joined the firm shortly after his departure.
The former SEC Chairman Jay Clayton is also under scrutiny now: he authorized the filing of the Ripple case on the last day of his service, after which he joined One River Hedge Fund, which bet heavily on BTC several days before the filing. Conflict of interest or even a “corrupt intent” are now the words casually associated with the lawsuit.
In August Ripple filed a motion to compel the SEC to disclose its employees’ XRP holdings in anonymized form ( if XRP were a security, they would be banned from holding it). This week the SEC opposed the motion, arguing that it would be an “unjustified intrusion”, while its Ethics Counsel confirmed that it had not placed XRP on a “Prohibited Holdings” list.
This is the last development of the Ripple v SEC drama so far, and the eyes of the whole XRP community are now on the Court. Crypto communities are very active, and the “XRP Army” is now scrutinizing every document of the case, every SEC official’s public appearance, any Internet trace… In July, when Judge Netburn ordered Mr Hinman to sit for a deposition, she pointed out a “significant public interest” in the case, and she wasn’t mistaken.
This case is important to every crypto circulating on the American soil, and in a broader sense – to the whole country. Whatever power the regulators have, it was given to them to accomplish the mission defined upon their agency’s establishment. When the mission is forsaken for the power, the regulators do more harm than good, and the Ripple case may very well serve as a wake-up call.
Art and NFT
This week Dfinity, the company behind Internet Computer (protocol aiming at enabling the public Internet to host smart contracts run on a BFT-based blockchain), dropped 10’000 clown-themed ICPunk NFTs on-chain. All of them were claimed in under 30 min, stress-testing the protocol, while creating a demand for the blockchain’s services and a valuable means of engaging with the community. Most importantly, this success showed a great public interest for Internet Computer, and its native cryptocurrency ICP price gained 33% since.
The company plans to launch an NFT marketplace in 2021, and to “experiment with the cross-chain solutions” to enable interactions with Ethereum and BSC in 2022.
Bitcoin gained another 6% this week, definitely breaking the $50k level and ending at around $51’800.
The analysts, even those from the institutional milieu, are mostly optimistic and continue calling for six-figure price. In its recent report Bloomberg pointed out that Bitcoin was well on its path to becoming world’s reserve asset alongside dollar, while JPMorgan Chase and BlackRock agree that Bitcoin is eroding gold’s market share as a store of value.
Ethereum gained an impressive 22% this week, now sitting just below $4k.
The price rise comes at the moment of high network activity, which, combined with the recently implemented EIP1559 upgrade, resulted in more Ethers being burned in transactions than being newly minted . This week for the first time we saw a deflationary 24h, making ETH scarcer – and thus more valuable.
Quote of the week
“Portfolios of some combination of gold and bonds appear increasingly naked without some Bitcoin and Ethereum joining the mix”,
Mike McGlone, Bloomberg’s senior commodity strategist