Ripple lawsuit nears end: Too late for crypto industry in the US?

Rick Steves

SEC v. Ripple Labs has entertained the digital asset industry ever since being filed in 22 December 2020. Nearly two years in, both parties have addressed the court to pursue a summary judgment in order to avoid going to trial.

The ruling will come at a time of intense pressure over the crypto asset space, with the ‘crypto winter’ curbing enthusiasm and forcing the industry to consolidate further.

The collapse of FTX has raised concerns that contagion may soon spread to other companies and panic could turn into a bank run. Experts have advised crypto firms to be able to service at least 50% of withdrawals at all times because things are expected to get uglier and the name of the game at this point is ‘survival’.

It’s in this backdrop that the Southern District Court of New York is expected to make a summary judgment instead of prolonguing the case further with a trial case.

The court decision is likely set a precedent in digital asset regulation in the United States, namely the role of the Howie test to ascertain whether a digital asset is a security according to the U.S. Securities Act of 1934.

SEC insists on claims but Ripple finds no proof

The SEC argues that Ripple Labs offered an sold investment contracts, with undisputed evidence that establishes common enterprise and horizontal commonality. The regulator added that Ripple’s public statements and economic reality of XRP led “XRP investors” to reasonably expect profits from Ripple’s efforts.

The term “XRP investor” is a loaded one as it is based on the claim that XRP is a security. Ripple, on the other hand, uses the term “XRP holders”. The Defendants rejected any obligation to XRP holders, so no expected profits from its efforts.

Ripple also argued that the SEC’s brief confirmed it can neither prove an “investment of money” nor a “common enterprise”.

Ripple called for summary judgment on offers to sell and sales on foreign exchanges. Likewise, Ripple co-founder Chris Larsen wants summary judgment on his offers and sales of XRP prior to September 2015.

The court’s decision could either reinforce the SEC’s assessments about the digital asset space or put the regulator on a leach, thus reducing the agency’s regulation by enforcement practice that has been spooking the ecosystem in recent years.

The recent SEC v. LBRY case, which ended a few weeks ago, might indicate the Securities and Exchange Commission has the upper hand in the Ripple lawsuit as well. In the LBRY case, the court ruled the firm offered its LBC token as an unregistered security. Even legal experts cheering for Ripple have said that SEC’s victory against LBRY is likely to have serious implications for Ripple.

US crypto industry moving overseas?

Last year, Ripple chief executive Brad Garlinghouse said that although in “markets like Singapore and even parts of Korea where there really has been a thoughtful government-led effort to define and have clear regulatory frameworks around cryptocurrencies… Ironically, here in the United States they have not provided that same clarity”. Ripple reportedly mulls a move overseas in case of an unfavorable result against the SEC.

With the emergence of the new MiCA regulation in the European Union and the rise of Dubai as a favorite destination for the global crypto asset industry, the United States risks losing talent to jurisdictions overseas in a technology that could further disrupt the financial industry and other sectors.

The ‘crypto winter’ seems increasingly far from over, with further contagion to make an impact on which companies will stay afloat in the coming months and years. The lack of regulatory clarity in the United States is one more nail that the ecosystem has been dealing with.

US-based crypto exchange and lending service has recently announced it will gradually phase out US operations as a direct result of a “dead end” in its attempts to gain clarity from US regulators.

Crypto firms in survival mode as winter sets in

Drew Niv, FX industry pioneer and former founder of FXCM, provided a few tips to crypto companies as they navigate a confidence crisis in both institutional and retail customer bases.

Crypto rescue funds are a “stupid idea”, he said, adding that the last thing Binance (and other firms in the same business) should be doing is putting up large sums for a rescue fund. “…Even if they didn’t defraud people it’s likely they will face lots of losses from defaulted loans, counterparty exposure, etc. Volumes are also way down so that’s never healthy for business”.

“The best thing Binance and its peers can do is survive and get to sustainable profitability. Given FTX is likely to take down a whole bunch more players and it looks like genesis and its parent are likely next big shoe to drop, pressure will increase on the industry and run on the bank will likely force a run on the bank 1929 style on crypto firms.

“Right now, firms need to look inward and prepare to survive 50% deposit withdrawal scenario. Anybody that freezes or even slows down withdrawals will turn that to 100% withdrawals. Genesis will have more contagion then even FTX and dozens if not hundreds of firms will disappear in the next 6 months”, said the thought leader.

“For crypto to survive there need to be some decent size survivors, who can live on prices much lower then here with volumes at a fraction of what they are now. These survivors will need to prove to the last remainig crypto customers that they are going to be around for a while mostly by just surviving. That is what the real crypto winter will look like so buckle up. Crypto firms need to disclose their issues, announce massive cost cuts, realign with reality, and repair their balance sheets. This journey will truly suck but any true survivors will come back much stronger and as the long term winners in the space”.

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