Ripple vs SEC: What does it mean for XRP?

Ripple is no stranger to lawsuits, a lot of big corporations are prone to getting sued from time to time. A group of losing investors who previously bought the XRP top during the 2017 bull-run sued Ripple. Under the pretense that they were “misinformed”.

Ripple is expecting a new lawsuit, but not just from anyone, from none other than the U.S. Securities and Exchanges Commission (SEC). This time it seems serious.

Ripple stated they are expecting a lawsuit from the SEC blaming them for the sale of unlicensed securities to US investors; the digital asset XRP.

How will the lawsuit end? What is the impact on Ripple? Will it cause a complete shutdown? Will it be settled with a few millions?

Most importantly, what is the effect of all this on XRP itself?

The Facts

Let’s start with the facts. There’s always been this question: is XRP a security? Is it?

This debate stems from the fact that XRP was created by the co-founders of Ripple: Jed McCaleb, Arthur Britto and Chris Larsen. Back in 2012 when OpenCoin was first founded (it was then named Ripple), raising money in crypto was not common, ICOs weren’t a thing yet. They raised $9 Million in one seed round from multiple investors but that was a small amount, so they gifted the company (Ripple) 80% of the XRP supply and retained the other 20% for themselves.

XRP is a security if it was created and sold for the purpose to raise money. The “gifting” part is what makes this debatable.

Other financial agencies such as the UK’s FCA and Japan’s FSA both have deemed that XRP is not a security. The SEC seems to be willing to take a different stance.

Jay Clayton (SEC Chairman) is bringing this action as his last act as he leaves office at the end of this year. Is this just a show of power? Does it mean the next SEC chairman will be more lenient?

Ripple have gathered a very strong team over the past few years, especially in the regulatory and legal department. They hired Sandie O’Connor who used to be Chief Regulatory Affairs Officer at JP Morgan Chase; meaning she knows how to deal with regulators better than most crypto-projects due to her experience. They had also hired former SEC Chair Mary Jo White to represent them in the XRP lawsuit a couple years ago.

It also seems Ripple have seen this coming for quite a while. This explains their sudden desire to move their headquarters out of the US. If that’s the case then they may already be well prepared for the legal battle.

However, we must say that they did scoop low by attacking Bitcoin and Ether to save themselves, Bitcoin especially being the father of crypto without which we would all not be here. 

Ripple critiques BTC and ETH as “the two Chinese-controlled virtual currencies”.

Previous SEC Cases

There is no better way to talk about the potential outcome of the SEC lawsuit against Ripple than seeing previous cases. We’re going to talk about two very specific cases that have been subject to the same allegations:

  • Block.One EOS
  • Telegram GRM

Block.One is the company that was behind the largest ICO to date: EOS. $4 Billion were raised between 2017 and 2018, without a finished product. The SEC brought forward a lawsuit against Block.One stating that EOS was an unlicensed security sold to US investors.

In this case, the money raised was to be used for company expenses according to the SEC. In Ripple’s case, it was “gifted” the XRPs and has been selling it to partially cover company costs. Even in the case of Block.One, the final scene was a $24M fine in civil penalties.

Telegram also got sued by the SEC for the sales of an unregistered security to US investors, but this one is different. They sold $1.7B worth of GRM tokens to 171 accredited investors only. Out of the those, 31 were based in the US and that made it the SEC’s job to pursue them.

The ultimate result was a complete shutdown, decided by Telegram. The reason being a US court of law which banned them from not only selling GRM tokens in the US but in the entire world. Why? Because a US resident could eventually find a way to purchase the asset from elsewhere.

The main difference is GRM tokens were not yet released to the public, whereas in the case of EOS it was “after the fact”.

Another lower profile lawsuit was initiated by the SEC against Kik for the same reasons (Coin: KIN) and the lawsuit settled for $5 Million.

The Ripple Outcome

Out of the two crypto-specific cases above, Ripple is closer to the Block.One as XRP is already available to the public. Of course, there’s also the difference of the “gifting” part.

Will the SEC drop the lawsuit after Jay Clayton leaves the office? Unlikely. But this is probably going to end with a hefty fine paid by Ripple to the SEC. They may then choose to move countries but they must first deal with the SEC. The SEC still has power even if they move because US investors were involved.

Until today, Ripple is the main driving force behind XRP. It pushes people to use it, markets it and funds projects through related companies/initiatives (i.e. Xpring) to increase usage of the XRP Ledger. After this lawsuit, things may have a to change. They might need another driving force in parallel. Any new team’s concern will be how much XRP Ripple holds, “gifting” them a portion may be a solution.

The impact on XRP’s price

Now that we got the lawsuit aspect out of the way, how does this affect XRP’s price?

The initial reaction was of course a drop as this is perceived as negative news. As shared in Discord right after the news break we closed the leveraged long from $0.47 at $0.50 because of the upcoming uncertainty, and we stayed in our comfortable spot buys from $0.20s. That proved to be the right decision. 

If we look at EOS, the lawsuit hit in a bearish market structure (lower highs and lower lows), the lawsuit did not change too much in the price path. The settlement announcement caused a +6% surge that day (30 Sept 19), but then it was back to the market and the technical aspect of price action is what reigned. 

As of now, XRP is holding its [$0.45-$0.47] support well, if the latter gives way it would be turn for $0.335. However, we cannot assume a break before it happens as [$0.45-$0.47] is a decently strong level. Additionally, the overall market structure of XRP remains a bullish one: higher highs and higher lows.

We are not expecting major movements until the dust settles and some direction becomes clearer. Until then we will remain in our comfortable spot bags from $0.20s.

We will continue to monitor the situation and provide updates as they take place

Disclaimer: NOT FINANCIAL NOR INVESTMENT ADVICE. Only you are responsible for any capital-related decisions you make and only you are accountable for the results.

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