Ripple – the blockchain technology company behind XRP – is seeking dismissal of the Security and Exchange Commission (SEC)’s 2020 lawsuit against the firm. It claims that XRP does not constitute an “investment contract”, and thus cannot be called an unregistered security.
Can Ripple End the Lawsuit?
As reported by BNN Bloomberg, Ripple’s weekend filing claims XRP investors do not have rights, and that Ripple is not required to act in their interests. It cited a lack of documents imposing such post-sale obligation on the firm.
“Filings show that the SEC is acting outside their legal limits,” said Ripple General Counsel Stu Alderoty in a statement. “The SEC is not looking to apply the law — they are looking to remake the law in the hopes that it can impermissibly expand their jurisdiction.”
In December 2020, the SEC sued Ripple for failing to register XRP as a security or provide adequate disclosures, thereby misleading investors. The endeavor allowed Ripple, CEO Brad Garlinghouse, and chairman Chris Larsen to collectively reap $1.3 billion.
The crypto industry has since awaited the lawsuit’s outcome with suspense, expecting it to set a precedent for the legal status of dozens of other coins.
Ripple said in its filing that the SEC is trying to claim jurisdiction over all asset transfers that may benefit from securities laws. As it alleges, this “untethered position” would convert numerous other ordinary asset transfers into securities transactions. These could include “diamonds, gold, soybeans, cars, and even works of art.”
The SEC’s Argument
Ripple’s filing is an attempt to nip the lawsuit in the bud before it reaches trial in a federal court in Manhattan. The SEC also attempted to end the lawsuit without trial in its own filing, alleging that XRP satisfied the Howey Test.
Specifically, the SEC called the purchase of XRP an “investment in a common enterprise with other XRP holders and with Ripple”. It also alleged that XRP investors expected to earn a profit upon buying the token.
“Ripple funded its business by touting XRP’s profit potential, selling and distributing XRP to public investors while keeping a large amount of XRP for itself.”
SEC chairman Gary Gensler has suggested that cryptocurrencies may more closely resemble securities if they use a proof of stake mechanism. Ethereum – the second largest cryptocurrency – transitioned to proof of stake last week.