Ripple and SEC's "Securities Dispute" is about to reach its conclusion, who has a better chance?

Recently, there have been reports in the cryptocurrency world that Ripple's lawsuit with the U.S. Securities and Exchange Commission (SEC), which has lasted for more than two years, may come to a conclusion this June or July. This highly anticipated legal battle will not only influence the direction of cryptocurrency regulation in the U.S., but it could also change the landscape of the entire crypto market.

Last week, the price of XRP affected by this case showed an upward trend, attempting to break through the support level. However, this week the situation took a sharp turn, and the price of XRP fell below market expectations. As of April 21, the price of XRP has dropped to its lowest level since March. It is well known that this pending lawsuit is a key factor influencing the price movement of XRP. As the case nears its conclusion, market sentiment has become increasingly unstable, and investors are beginning to closely monitor the direction and potential outcomes of this protracted legal battle.

Ripple-SEC Three-Year Lawsuit Finally Sees Hope

The legal dispute began in December 2020 when the SEC accused Ripple of violating federal securities laws. The SEC believes that Ripple and its founders engaged in the sale of XRP to investors for profit, which constitutes a securities transaction, but Ripple did not register XRP as a security. According to federal securities laws, all issuances and sales of securities, including those involving digital assets, must be registered or qualify for an exemption from registration.

As early as 2019, the SEC released an analytical framework regarding whether digital assets constitute securities based on the Howey test. The SEC believes that if the development of a digital currency relies on the efforts of a particular company and investors expect to earn a reasonable profit from their investment, then this digital currency will be considered a security. Conversely, if a digital currency is sufficiently independent and decentralized, such that no participant can influence its operation and investors do not have profit expectations, then this digital currency does not fall within the category of securities.

This analytical framework, while not formal regulatory law, provides some regulatory expectations for crypto companies. Under this framework, centralized currencies like XRP can easily be viewed as securities. However, Ripple maintains that its cross-border payment coin does not belong to the category of securities.

Since then, both parties have engaged in nearly three years of legal tug-of-war, with the focus of the debate always centered on the question of whether "XRP is a security". As of March this year, both sides were still defending their respective positions.

SEC Chairman Gensler stated that the SEC has the authority to determine which digital assets are classified as securities without needing legislation to define them. He believes that the existing securities laws already cover most activities in the crypto market. While Congress could take action to clarify further, he thinks there is no need to grant additional powers. However, Ripple CEO Brad Garlinghouse argues that such decisions should be based on legislation rather than the personal views of the SEC Chairman.

On April 8, Gensler stated in a social media post that there is no incompatibility between the crypto market and securities laws. The SEC's goal is to make the crypto space compliant with securities laws, ensuring that digital asset investors receive the same protections as those in other markets. However, Ripple's policy head, Susan Friedman, believes that there are essential differences between cryptocurrencies and securities, and that specific rules need to be developed rather than adopting a one-size-fits-all regulatory approach.

Both parties hold their own views. Recently, industry insiders stated that the SEC's lawsuit against Ripple will reach a final ruling in the first half of this year.

Why has the "Securities Dispute" between Ripple and the SEC lasted so long?

The core of the debate between the two parties over the years revolves around the question of whether the issuance of XRP is for the purpose of sale.

From a broader perspective, the dispute between both parties actually involves the more fundamental question of "who has the right to decide whether a digital asset is a security." For crypto companies and exchanges, this is a battle of interests; for U.S. regulators, it is a contest of regulatory power. The outcome of this dispute will set the tone for future regulatory rules in the U.S. and will also impact the future direction of the crypto market. Therefore, a victory for either side will inevitably compress the rights space of the other, which is also the reason why both sides have been at an impasse.

On April 20th, a veteran financial journalist published an investigative report on Ripple's business practices. The report revealed that Ripple sold a large amount of XRP through its main partner in Malaysia and pointed out how Ripple promoted its core business through data packaging.

As is well known, cross-border payments are the core business of Ripple, divided into two business lines: one involving XRP and the other not involving XRP. However, in reality, only the business line involving XRP is truly profitable. The journalist believes that Ripple has achieved rapid growth by promoting its liquidity payment technology (ODL) for XRP. In response, Ripple's Chief Technology Officer stated on social media that what Ripple is doing is merely to make XRP as widely used as possible, not for the purpose of selling for profit. Ripple's ability to profit and maintain operations is purely a matter of luck. Therefore, it is difficult to definitively determine "whether XRP is intended for sale" in such business.

Gensler's stance is tough, not only in order to compete for cryptocurrency regulatory authority but also as a response to the endless and complex operational models of cryptocurrencies, which are more likely to give rise to gray areas. According to reports, Gensler recently criticized the compliance of cryptocurrencies during his testimony in Congress and expressed concerns about the regulation of stablecoins. He stated that in his 40 years in finance, he has never seen a field so non-compliant with securities laws. He also confirmed that if cryptocurrency tokens are deemed securities, any platform trading such tokens must register as a national securities exchange and be subject to SEC regulation. Gensler's approach to regulation is extremely tough, insisting on maintaining existing regulatory guidelines without making significant changes.

At the same time, he also believes that the digital asset market needs to be more compliant. Because it seriously jeopardizes the interests of investors and undermines public trust in the capital market, which could threaten investors' lifelong savings. Ripple believes that once XRP is classified as a security, it will be subject to strict regulation, which would, to some extent, stifle crypto innovation. Both sides hold their ground and remain at an impasse.

The entire Ripple-SEC lawsuit also reflects the current state of the cryptocurrency market in the United States, where emerging markets still have many gray areas in legislation and regulation. The scope and responsibilities of regulation are unclear, and the expectations of cryptocurrency companies regarding regulation are also unstable. The cryptocurrency market still needs a clearer regulatory framework to reduce potential market chaos, and the outcome of this lawsuit will become an opportunity to promote regulatory reform in the cryptocurrency space.

Which side has a better chance of winning?

The direction of cryptocurrency regulation will ultimately depend on the final judgment results.

Due to the extreme volatility of the cryptocurrency market, the price of XRP can also be seen as a reflection of investor sentiment regarding this lawsuit. There have been reports that Ripple may win the lawsuit against the SEC, and as a result, the XRP token rose by more than 20% within 24 hours. Recently, the price of XRP surged, and some believe that it was due to support from well-known influencers and prominent figures expressing their backing for the impending conclusion of the Ripple-SEC lawsuit, which drove up the price of XRP as it seems highly likely that Ripple will prevail in the lawsuit.

However, a lawyer involved in the litigation believes that the SEC and Ripple lawsuit could end in a draw. This is because the SEC's own experts admit that since mid-2018, the price of Bitcoin and Ethereum can explain up to 90% of the XRP price fluctuations. At the same time, the SEC argues that Ripple Labs holding a high proportion of XRP means that XRP is centralized and is a security. These two statements and positions are contradictory.

The ruling on this lawsuit is expected to be announced in a few weeks. Overall, the XRP community remains optimistic about the current situation. They believe that the regulatory agencies have inconsistent positions and that the judge is unlikely to support the SEC as a result. However, all parties will actively fight for their own interests. It is only when the final ruling is issued that this three-year legal dispute can truly come to an end.