SEC Ends Ripple Lawsuit: Here’s Why It Matters

Ripple Labs has taken a big step on its long, long road to victory over the Securities and Exchange Commission (SEC).

In a message last week, Ripple CEO Brad Garlinghouse revealed that after four years, the SEC had ended its case by dropping an appeal of a judgement that found that the company’s sale of XRP to retail buyers were not securities sales.

“Reflecting on four years ago, it seems very clear to me that this case was doomed from the start,” Garlinghouse said. “In so many ways, it was the first major shot fired in the war on crypto. I truly felt like I knew then that Ripple was not only on the right side of the law, but I felt that we were also going to be proven to be on the right side of history.”

The decision is hardly a surprise, given that the SEC has already dropped cases against cryptocurrency exchanges Coinbase and Kraken, among others, for selling unregistered securities, and that the agency's new leaders have put together a task force to review its handling of cryptocurrency cases in the past.

Under the Biden administration, former SEC Chairman Gary Gensler maintained that effectively all cryptocurrencies except Bitcoin and eventually Ether were securities that needed to be registered with the agency before being sold to the public.

The Ripple case, however, began under SEC Chairman Jay Clayton, and was one of the first major cases the SEC brought against the crypto industry, along with Telegram and Block.one.

Incomplete Victory

The withdrawal of the SEC’s appeal isn’t the end of the case. The district court judge who oversaw the trial found that Ripple’s sale of XRP to institutional buyers were securities sales, banned any such future sales and fined it $125 million.

Ripple is still appealing those two parts of the verdict.

Those rulings were based on the Supreme Court’s Howey test of what security is: It must be an investment of money in a common enterprise with an expectation of profit primarily driven by the efforts of others. The judge essentially found that sophisticated investors like hedge funds were buying XRP early as an investment, whereas retail buyers were not basing their purchases on the efforts of Ripple.

The case began in December 2020 when the SEC accused Ripple and its two top executives, executive chairman Chris Larsen and Garlinghouse, of conducting a seven-year-long unregistered securities sale. The case was unusual in that the crypto securities lawsuits that followed did not cite executives personally, just funds raised in ICOs. Then again, Larsen and Garlinghouse had sold a combined total of $600 million in XRP.

The SEC sought the disgorgement of those funds as well as the money made from Ripple’s sales. Judge Analisa Torres, who rendered the verdict, did not allow the SEC to force Ripple to give back any of those funds.

Fighting to the End

Notably, Ripple was the first major case that was not settled.

In June 2020, Telegram settled a case accusing it of illegally selling tokens as part of its TON blockchain sale and returned more than $1.2 billion to buyers. Block.one got off easier in 2019, paying just a $24 million fine over its sale of more than $4 billion in tokens in an initial coin offering (ICO) as part of the creation of EOS.

Ripple was clear from the start that it was going to fight, partly because it already had a going business providing banks with a method of using Ripple’s liquidity to make cheap and near-instant cross-border transactions via its RippleNet product. One bank would buy XRP and transfer it to another, which would then sell it almost immediately, ensuring it got the full value of the transaction.

It had also teamed up with MoneyGram to enter the global remittances market, with Moneygram using XRP for cross-border transactions that could be faster and cheaper than traditional methods, which can take days and cost as much as 5% to 7% of the funds being transferred when the amounts are small.

XRP spiked 10% on the news before pulling back. That’s a relatively modest increase given the importance of the SEC’s actions, but the win had likely been priced in already in the post-election bump from $0.50 to $2.71, a 442% increase.

Ripple was founded in 2012 by Chris Larsen and Jed McCaleb and began raising funds in 2013. McCaleb left the company and went on to co-found Stellar, the 16th largest cryptocurrency with a market capitalization of $8.8 billion. XRP is now the third-largest cryptocurrency, with a market cap of $145 billion.