SEC v. Ripple: Did The Government Fail To Prove Its Case?

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The saga for what Forbes has called “ the cryptocurrency trial of the century” looks as if it is about to enter its closing stages. Final briefs on summary judgment were filed in November of last year by the U.S. Securities and Exchange Commission (SEC) and the payments software company Ripple Labs in SEC v. Ripple .

Nearly two years of arguments are now in the hands of Judge Analisa Torres of the Southern District of New York, who is expected to rule sometime in the first quarter of this year.

SEC v. Ripple

The issue revolves around how Ripple uses the XRP token and its decentralized ledger as a tool for its cross-border payments software that it sells to international banks and money transmitters. The company and two of its executives sold large amounts of the token to exchanges starting in 2013, which fed a substantial secondary market for the cryptocurrency and an ecosphere for the XRP Ledger for businesses and individuals without the involvement or permission of Ripple.

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The legal dispute is rooted in different interpretations of the so-called “Howey test” from the 1946 Howey decision from the US Supreme Court, which defined whether a financial instrument should be considered an investment contract, and therefore a security: the investment of money in a common enterprise with a reasonable expectation of profits to be derived solely from the efforts of others.

The SEC based its December 2020 lawsuit on the contention that, under the Howey test, the XRP token has always been a security because its only purpose is as an investment in Ripple as a company. This means the token itself is a security, not merely in the manner that Ripple and its executives sold it, and all sales of the token have been unregistered securities trades from inception to present day, including on the secondary markets.

The defense countered that XRP has more uses than Ripple’s software product, and it is more a commodity, not an investment in their company. They also used market history data to argue its value is not tied to Ripple’s success or failure, and that it operates on a decentralized ledger which will continue to exist even if Ripple closes shop.

Ultimately, the burden of proof is on the SEC to prove its expansive legal theory that a digital token itself is a security no matter who holds it, and investment contracts can be struck without the vast majority of purchasers knowing about the alleged common enterprise or the many unrelated use cases the token can fulfill.

Most legal experts and crypto practitioners who have followed the landmark case appear to believe the U.S. government failed to prove its legal theory for bringing the enforcement action. Further, they believe Ripple’s defense team has raised serious doubts around the regulator’s broad application of a nearly 80-year old Supreme Court decision to decentralized cryptocurrencies and blockchain networks.

Ripple’s side has been boosted by an unusual number of filings from “amici curiae” – or friends of the court – including the Blockchain Association, the Crypto Council for Innovation and the publicly-traded crypto exchange Coinbase, who all opposed the sweep of the SEC’s legal theory. Businesses that use XRP as a utility token for settlement of transactions in bitcoin or fiat currency also contradicted the SEC’s allegation of a “common enterprise” with Ripple.

XRP Holders Oppose The SEC's Complaint

A long anticipated amicus brief came from a class of over 75,000 XRP retail holders who opposed the SEC’s complaint.

They attacked the SEC’s “shorthand and analytically lazy contention that Ripple has engaged in the functional equivalent of a nine year-long, on-going, 24/7 ICO, and that each and every sale of XRP, from anywhere in the world, offered by anyone, including amici, was, is, always has been, and always will be, the offer and sale, of a security.”

As part of its summary judgment motion, Ripple submitted 3,000 affidavits from XRP retail holders who told the court they’d never heard of the company when they acquired XRP.

J.W Verret, associate professor of law at George Mason’s Antonin Scalia Law School, found Ripple’s arguments to be stronger in interpreting Howey, and that “any SEC victory now will likely be thrown out by the current Supreme Court on the major doctrines question”. Verret called the legal theory at the heart of the SEC’s lawsuit “obsequious”.


Curt Levey, of the Federalist Society, agrees with Verret’s assertion that the current Supreme Court would take the Ripple case on appeal to review Howey’s application to digital assets, “ideally ruling that decentralized cryptocurrencies don’t meet the test.”

Levey writes that “the Howey test is a poor fit for crypto” because “buyers of cryptocurrency are typically unaware of and don’t care what third party first created the crypto token or decentralized blockchain.” “They use tokens for digital payments on networks and for access to smart contracts and decentralized apps, among other things,” he said.

Forbes columnist Roslyn Layton criticized the SEC’s contention that Ripple, its executives and the whole market should have known that XRP was a security back in 2013. She notes that after a long and bitter discovery fight in court, Ripple’s defense obtained documents that it said showed the SEC was internally unsure about whether XRP was a security, and gave vague and unclear guidance for years.

“Ripple didn’t need to look too hard to document how the SEC had repeatedly waffled before market participants for years over whether XRP was a security” Layton wrote. “Yet, it now alleges that Ripple and everyone else in the market should have known anyway.”

Florida attorney Jeremy Hogan, who has followed the case on his popular television show on YouTube, believes the SEC’s arguments have fallen short and that Ripple will win at summary judgment, in large part because “Ripple had no legal obligation to purchasers of XRP after the sales occurred”. He cited an extensive amicus brief from the Wall Street investment firm Paradigm which argued the SEC failed to meet the “investment contract” definition on XRP sales.

The last year has made it abundantly clear that the cryptocurrency market has more risks than investors had previously recognized, and the SEC doubtless feels a modicum of political pressure to help investors be better informed of such risks. However, categorizing XRP as a bona fide security will do little to accomplish such a task.