It’s been more than a year since the SEC stunned the technology world by suing Ripple, kicking off what has become the most closely watched legal battle in crypto.
The case, in which the SEC accused the crypto powerhouse of violating securities laws, has morphed into a protracted brawl, with the future of crypto regulation potentially at stake.
The battle will likely drag on into next year after Ripple and the SEC agreed on a schedule for the next phase of the case: Filings and hearings on motions for summary judgment will extend to December. At that point, a federal judge will either decide the case or have it go to trial.
“It now looks like a resolution will come in 2023,” Ripple general counsel Stuart Alderoty said in a tweet.
The battle, which began in December 2020, centers on the SEC’s claim that Ripple failed to register roughly $1.4 billion worth of XRP as securities.
The lawsuit’s outcome could have far-reaching implications for crypto. If the SEC prevails, it could upend the way crypto companies operate, setting a precedent that the digital assets they offer users must be subject to the strict reporting and registration rules that apply to securities.
If Ripple wins, it would be a major victory for crypto at a time when the industry is growing rapidly but also facing more intense regulatory scrutiny on multiple fronts.
The drawn-out court battle has been frustrating for Ripple, which has accused the SEC of legal bullying and delaying tactics. Alderoty suggested Ripple had no choice but to agree to the extended schedule.
“To those asking if this is a joint filing — yes it is,” he said. “But, based on the SEC's track record, if we didn't agree to this, the next iteration would have very likely been even longer.”
“Chair Gensler preaches ‘justice delayed is justice denied’ when firms defend themselves from SEC bullying investigations / inquiries,” he added, referring to SEC head Gary Gensler’s November 2021 speech in which he promised that the agency will “focus on bringing matters to resolution swiftly.”
But the Ripple case is “quite the contrast from the SEC using every tactic at their disposal to keep this cloud of uncertainty over the market,” he said. “Justice delayed indeed.”
The SEC “does not comment beyond public filings,” a spokesperson told Protocol.
The battle has unfolded at a critical time for crypto. The industry has gone through dramatic changes since the SEC sued in 2020, from the industry’s rapid growth and the rise of new players and new asset types like NFTs to heightened regulatory and political scrutiny of crypto in key markets including the U.S., Europe, China and the U.K.
The Ripple lawsuit “is an indictment of the SEC’s regulation-by-enforcement approach,” Alderoty told Protocol.
CEO Brad Garlinghouse voiced a warning that regulators like the SEC are holding the U.S. back from crypto’s upside potential. “The SEC seems perfectly content to let the US fall further behind — all in the name of protecting their own jurisdiction at the expense of US citizens,” he said in a tweet.
For crypto skeptics and critics, who include prominent figures like Sen. Elizabeth Warren and a range of legal and financial experts, the Ripple suit is about reining in a fast-spreading trend that could seriously undermine laws meant to protect investors and the financial system.
Crypto’s explosive growth over the past two years has triggered a strong push for more transparency and accountability from companies that offer an expanding selection of digital assets and services amid mounting fears of instability that could lead to a financial crash.
The SEC argues that XRP is essentially an “illegal securities offering” and that Ripple did not provide “the type of financial and managerial information” required by law. The agency said Garlinghouse, who was named in the suit together with co-founder Chris Larsen, has said “repeatedly that he was ‘very long’ XRP, meaning he held a significant position he expected to rise in value, without disclosing his sales of XRP.”
Stephen Diamond, a veteran Silicon Valley lawyer and a law professor at Santa Clara University, said Ripple essentially “took people's fiat currency, handed people something called XRP and said the value of your XRP will go up or down depending on whether we're successful at building out the use case for XRP.”
Distributed ledger, the core technology in crypto, he argued, “is a con game being played by crypto to evade regulation by the SEC and others.”
But Ripple has consistently rejected the SEC’s argument about XRP, which it maintains is a utility token for payments, not a speculative asset; that it was issued prior to Ripple’s founding; and that Ripple never sold XRP as an investment. (It does sell XRP to provide what it calls "on-demand liquidity" for customers.)
“There was never a contract for an investment,” Alderoty said. “Owning a unit of XRP provides no right title or interest in Ripple or any distribution of profits from Ripple.”
The filing of the lawsuit, late in the term of former SEC Chair Jay Clayton, had a devastating effect on Ripple, sending XRP’s market value crashing in December 2020. Alderoty portrayed the legal action as “a rug pull by the SEC” that wiped out $15 billion in XRP coins’ value “the day the suit was filed, hurting the very people the SEC purports to protect.”
The Gensler effect
The lawsuit also put an early spotlight on Gary Gensler, who took over the agency just four months after it was filed.
Gensler was initially welcomed by the crypto industry, including Ripple. “I think it is refreshing to have somebody like Gary Gensler in office because he taught blockchain and technology at MIT,” Alderoty told Protocol last year.
That attitude quickly changed. Gensler sent a strong message that he would also take an aggressive stance toward crypto. Alderoty now routinely attacks Gensler on Twitter, accusing him and the SEC of leveraging “every tactic to create market confusion.”
Gensler hit back in his November speech, though he didn’t name any particular company or executive: “Some market participants may call this ‘regulation by enforcement.’ I just call it ‘enforcement.’”
XRP has bounced back from the December 2020 crash, although the currency has fluctuated sharply as the crypto market entered another period of sharp volatility.
Ripple also says the SEC lawsuit has not slowed Ripple’s growth internationally where its cross-border payments technology has continued to make gains. “Our business has been thriving outside of the U.S.,” Alderoty said.
In fact, the company announced in January that it was buying back shares from a $200 million series C round in 2019. Garlinghouse said business was doing well, “despite these crazy headwinds.”
But Ripple has stepped up the pressure on the SEC, lambasting the agency decision to sue. Perhaps Ripple’s most compelling line of attack is focused on former SEC director William Hinman’s 2018 speech in which he said ether is not a security. His comments sparked a rally in ether’s price, and appeared to endorse the crypto industry’s position.
Hinman was still a member of the SEC leadership under Clayton when the agency sued Ripple. (He and Clayton stepped down at the end of 2020.)
Ripple has demanded that the SEC release emails related to the way the speech was discussed internally. The company scored a victory when a federal judge last month reaffirmed the SEC must produce the emails.
In what appeared to be another blow to the SEC, a nonprofit whistleblower group called Empower Oversight recently published SEC emails that showed conflicts of interest in Hinman’s role as an SEC director.
The emails suggested that Hinman was working for a law firm that was part of the Enterprise Ethereum Alliance, which is dedicated to promoting the commercial use of Ethereum. Ether is considered an XRP competitor, which immediately raised questions on Hinman’s role in voting to sue Ripple.
Alderoty said the Hinman emails showed that there clearly was “a control breakdown” at the SEC. “How did that happen?” he said. “It just seems to me that that's a basic question that the SEC should be asking itself. There was a controlled breakdown, and why isn't the SEC taking this control breakdown seriously.”
Hinman, now a senior adviser with the Simpson Thacher law firm and an advisory partner at a16Z’s crypto team, could not immediately be reached for comment.
It’s unclear what impact the issues related to Hinman would have on the case. Judge Sarah Netburn of the U.S. District Court for the Southern District of New York could issue a final decision based on both sides’ presentations, or she could say the case should go to a jury trial. That would mean the case could go on even longer.
In any event, the stakes are high for both sides.
“What we've said since Day One is that Ripple is defending this lawsuit not only on its own behalf but on behalf of all of the entire crypto industry,” Alderoty said.
In his speech, Gensler signaled that he’s not backing down as he leads the SEC “to pursue misconduct wherever we find it” — including crypto.
“I’ve learned in my first six months here that there are all too many fraudsters, penny stock scammers, Ponzi scheme architects and pump-and-dump cons taking advantage of investors,” he said. “We have to protect the public from as many of these scams as possible.”
Update, May 2: We clarified Ripple's stance on sales of XRP.