We will soon know if Ripple’s executives were warned of the possibility of an SEC lawsuit ahead of XRP’s launch.
Ripple’s court battle with the United States Securities and Exchange Commission has recently seen new developments that, according to some observers, could foreshadow an impending resolution of this massively consequential case. Feb. 17 marks the deadline for Ripple to unseal a series of 2012 documents whose contents will likely sway the opinions of both the court and the public toward either one side or another. In another plot twist, the court’s decision to treat some of the SEC’s documents as open to discovery could set a groundbreaking precedent for similar cases involving U.S. executive agencies. Here is where things stand ahead of the next round of the showdown.
What’s at stake
The SEC’s lawsuit against Ripple Labs Inc., filed on Dec. 23, 2020, alleges that the company raised upward of $1.3 billion by selling the XRP token without registering it as a security, which is what the agency considers it to be. Ripple’s argument is that XRP is a tool that facilitates international payments rather than an unregistered investment product and that the agency’s jurisdiction does not extend to the token and its sales.
This is not the first lawsuit against a digital asset issuer that the securities regulator has brought. However, the vast majority of such cases end in a settlement instead of going to trial. In this scenario, individual crypto firms yield to the SEC’s demands and pay penalties to be let go. The regulator’s case never reaches the stage where it can be scrutinized by a judge or a jury panel. No precedent for similar cases in the future is set.
Unlike many others, Ripple chose to go all the way and get into a legal fistfight. If the SEC scores a W, court precedent will reinforce the agency’s claim for regulating much of the crypto market using “tried and tested” securities laws. If Ripple prevails, the need for a more nuanced regulatory regime tailored to various types of digital assets will become more evident than ever. It goes without saying that the SEC’s regulatory ambitions would suffer a major blow if the latter scenario plays out.
While both Ripple as a company and the vociferous online community of its token’s supporters, known as the XRP Army, have been a divisive presence in the crypto space, the lawsuit’s resolution will affect the entire U.S. digital asset industry.
2012 legal memos
One of the pillars of Ripple’s defense is that it simply did not know that its XRP token could be categorized as a security. The SEC, the argument goes, should have notified the company of its intentions before taking the matter to court. By not doing so, the agency denied Ripple what is known as fair notice.
This powerful argument could go bust, though, if it turns out that Ripple knew it was possible the SEC would take issue with the status of the token. Peter Vogel, of counsel and a member of the Blockchain Task Force of law firm Foley & Lardner, explained to Cointelegraph:
“U.S. District Judge Analisa Torres ruled that by Feb. 17, Ripple would have to make public sealed legal memos from 2012 from Ripple’s lawyers advising Ripple before launching XRP. The SEC claims that Ripple was advised in 2012 that XRP would be deemed a security under federal law, so Ripple was well aware of the risk that the SEC would bring a lawsuit. Ripple claims that the 2012 legal memos related only to proprietary internal strategies.”
If the memos clearly point to the absence of a federal law violation, Ripple’s argument will receive a massive boost. However, evidence suggesting that the firm’s executives chose to ignore their lawyers’ relevant concerns ahead of launching XRP could considerably deflate Ripple’s fair-notice argument.