Ripple has been fighting the SEC’s allegations that it held a $1.3 billion unregistered securities sale since the SEC filed its court case in December 2020. Now the SEC and Ripple have filed for a summary judgment from US District Judge Analisa Torres on whether XRP qualifies as a security, based on the evidence that both parties submitted so far.
To qualify as a security, XRP would have to meet the conditions in the Howey Test, which states that an asset counts as a security if the investment contract involves:
- An investment of money,
- In a common enterprise,
- With the expectation of profit,
- To be derived from the efforts of others.
Ripple denies XRP passes the Howey Test
Ripple denies that XRP qualifies as a security, claiming that sales of the token never included an investment contract.
“The SEC’s untethered position would convert the sale of all types of ordinary assets — diamonds, gold, soybeans, cars, and even works of art — into sales of securities,” says its filing for a summary judgment.
Investors typically regard diamonds, gold, and soybeans as commodities — something the CFTC would normally regulate.
Ripple claims SEC conflict of interest
In April 2022, the watchdog group Empower Oversight obtained emails between the SEC’s ethics office and former SEC director William Hinman through an FOIA request. The SEC’s ethics office expressed concern about a possible conflict of interest since Hinman had a financial stake in a law firm called Simpson Thacher & Bartlett.
Simpson Thacher & Bartlett joined the Enterprise Ethereum Alliance and advised the Ethereum development team on legal matters. The SEC ethics office pressed Hinman to either divest from the firm or recuse himself from any issue that could affect Simpson Thacher & Bartlett.
Hinman did not devest and rejoined the firm as a senior advisor after leaving the SEC. He reportedly made millions from his association with Simpson Thacher during his tenure at the SEC.
While working at the SEC, he made a famous speech in which he opined that Ethereum was not a security. Now that Ethereum has switched to a Proof-of-Stake (PoS) algorithm with successful activation of the Merge, it seems like the SEC disagrees.
Predictably, Ripple’s defense team latched onto the files obtained by Empower Oversight’s FOIA request. It claimed that the files indicated a conflict of interest when dealing with the similar Ethereum.
Even before Empower Oversight obtained the documents, including proof of a potential conflict of interest, a federal judge dealt setbacks to the SEC’s case against Ripple by ruling that the SEC cannot claim confidentiality in documents that include a draft of Hinman’s speech. Since April 2022, Ripple has used the documents obtained by Empower Oversight as an important part of its legal defense.
The SEC disputes Ripple’s claims
The SEC disputes Ripple’s assertion that it didn’t know Ripple qualified as a security: “Defendants made a calculated decision to risk an SEC or private lawsuit in order to profit by over $2 billion and cannot now feign surprise that their day in court has come.”
It points to Ripple co-founder Brad Garlinghouse’s 2018 tweet denying that regulatory uncertainty existed in crypto markets. He called “regulatory uncertainty” a euphemism for “we wish we could ignore SEC regulations.”
Where do Ripple-related airdrops stand?
Holders of XRP may recall that there were a few airdrops. However, not all of them went smoothly. The Spark token (FLR) airdrop should have happened in December 2020 and a snapshot of XRP token holders occurred on December 12, 2020. However, the airdrop faced a series of delays, finally occurring in March 2022.
Even before the FLR airdrop should have originally occurred, the IRS began scrutinizing airdrops. The IRS Revised Rule 2019-24 classifies digital assets as virtual currency that is subject to income taxes.
Sologenics’ SOLO Token airdrop established that airdrops can still impact a digital asset’s value. XRP jumped by 10% before the airdrop occurred. Large XRP token holders also moved millions of XRP before the airdrop.
Members of “Crypto Twitter” previously warned that 99% of XRP-related airdrops are scams while surges in activity related to airdrops caused XRP nodes to slow down or reboot.
The issue impacted Ripple’s S1 and S2 nodes. Even one XRPL Labs engineer admitted that the ledger “needs fixing” if surges in activity could cause nodes to crash.
If Judge Torres rules that XRP is not a security, Ripple and XRP investors could claim victory.
Since the filing for the summary judgment, some digital asset investors have been snapping up XRP in a bet that Ripple will come out on top. XRP’s price jumped by just over 12% over the past seven days, pushing it to #6 by market cap on CoinMarketCap.