Understanding the Origin of Ripple Lawsuit
The Ripple lawsuit refers to the legal action taken against Ripple Labs Inc. by the United States Securities and Exchange Commission (SEC). The lawsuit was filed on December 22, 2020, during the tenure of then-SEC Chairman Jay Clayton.
On 13th, July 2023, US District ruled that the XRP token is not a security but Ripple’s institutional sales broke the law.
How Did the Lawsuit Begin?
Ripple Lab made its debut in the finance industry in 2005. The US-based hi-tech company started by providing financial services to financial institutions including secure payment and transaction. In 2012, the distributed open-source protocol- Ripple was released, enabling tokens supporting fiat currencies and other cryptocurrencies.
Meanwhile, XRP was introduced as a medium token for transactions on the platform. However, in the coming years, the implications for XRP have developed out of a medium token. It was leveraged to raise funds for the company. Consequently, the United States Securities and Exchange Commission (SEC) filed a lawsuit against it on 22nd, December 2020, by
The SEC argues that XRP should be classified as a security under the Howey Test, according to which, Ripple Labs, along with its CEO Brad Garlinghouse and co-founder Chris Larsen, conducted an unregistered securities offering by selling XRP, the digital asset associated with Ripple, to investors.
The Legislative Pillar of the Securities in the US- Howey Test
The “Howey Test” is a legal framework used by the United States Securities and Exchange Commission (SEC) to determine whether a particular transaction qualifies as an investment contract and therefore falls under the definition of a security. The test derives its name from the 1946 Supreme Court case SEC v. Howey, which set the precedent for this analysis.
The Howey Test consists of four criteria that must be met for a transaction to be considered an investment contract, including investment of money, expectation of profits, common enterprise, and profits from efforts of others, rather than the individual investor’s own efforts.
The SEC argues that XRP should be classified as a security under the Howey Test. It claims that Ripple’s sale of XRP meets the criteria of an investment contract because investors provided funds to Ripple in exchange for XRP with the expectation of profit from Ripple’s efforts to develop and promote the XRP ecosystem. The SEC argues that Ripple failed to register the XRP offering as a security with the SEC, violating securities laws.
While Ripple took a different approach to defend itself. It claimed that the SEC never warned or notified it as a security.
On 13th, July 2023, US District ruled that $729 million worth of XRP was indeed a security when sold to institutional investors, but that the chunk bought by retail investors on exchanges didn’t meet the Howey test for an investment contract under federal law. And this has marked the partial win of Ripple Lab.
The lawsuit had significant implications for Ripple and the broader cryptocurrency industry as it raised questions about the regulatory status of cryptocurrencies and how they should be classified under existing securities laws.
