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A cryptic legal battle involving the Securities and Exchange Commission and fintech startup Ripple Labs may provide clarity on how much authority the SEC has to regulate the $2.2 trillion crypto market.

The bad blood between Ripple and the SEC began in December 2020 when the SEC filed a lawsuit alleging that global payments platform Ripple Labs violated securities laws by failing to register its XRP cryptocurrency as a security. . The move was one of the last made by then-SEC Chairman Jay Clayton before stepping down following Joe Biden’s victory over Donald Trump in the 2020 presidential election.

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At the time, Ripple was using XRP as a vehicle for financial institutions to finance its core business of seamless cross-border transactions, the SEC alleges, something that lasted seven years since its inception in 2013. was doing since

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The lawsuit not only took Ripple by surprise, but added even more confusion to an already complicated regulatory conversation about whether cryptocurrencies should be considered securities, commodities or anything else. If cryptos are securities, as defined by court precedent, they must be approved and regulated by the SEC which demands various company disclosures.

Ripple believes that XRP is not a security, so it does not need the green light from the SEC. In addition, it states that the SEC currently allows other cryptocurrencies such as bitcoin and ethereum to be traded like commodities; The blockchain network of these cryptocurrencies does not need to be registered as a security.

The SEC argues that Ripple is different because XRP was actively used to fund Ripple’s business and essentially represents an investment in the company itself. Thus it constitutes a security, not a commodity, and falls under the regulatory purview of the SEC, known as the Howe test.

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“Chairman Gensler and the SEC should give clear guidelines on which cryptocurrencies they view as securities and which do not,” Sen. Pat Tomy, ranking member of the US Senate Banking Committee, told Granthshala Business. “Regulation by enforcement is extremely objectionable and will affect domestic innovation.”

The lawsuit, which is currently in court, has proven detrimental to Ripple’s business, resulting in XRP being delisted from more than 50 exchanges and reducing its value.

Ripple says its domestic business has essentially come to a standstill and is now dependent on its overseas market for most of its revenue.

Despite business problems, Ripple is refusing to back down; People close to the company told Granthshala Business that they have no plans to settle with the SEC.

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The case itself will be a major test for Gary Gensler, President Biden’s choice to run the commission. Gensler has vowed to make the nascent cryptocurrency business a top priority during his tenure and has been more of an activist in the crypto space than his predecessor, Clayton.

Gensler, appearing before the Senate Banking Committee last week, acknowledged that the SEC is looking to expand its jurisdiction over the crypto industry by seeking more regulatory power from Congress.

This could prove to be bad news for Ripple and, indeed, the future of innovation in the crypto space, which critics say could be stifled if Gensler gets his way.

On Monday, Coinbase announced that it was abandoning plans to launch a cryptocurrency lending program, noting the SEC’s threats that it would sue the company if it goes ahead with a lending facility that offers customers a stablecoin. will allow interest to accrue on the currency. Businessman. A stablecoin is a type of crypto asset that is pegged to a recognized currency such as the dollar. The SEC states that the facility would constitute a security and would therefore need to be regulated as an investment product.

The news came just two weeks after the Coinbase CEO began a series of tweets that the SEC was not clear in its policies and declined to meet with the company to provide clarity.

As the laws become more blurred, other crypto companies may begin to outsource their digital payments businesses overseas, where there is a much softer attitude towards cryptocurrencies.

Meanwhile, the general consensus of securities experts is that the Ripple lawsuit will be a litmus test for how the digital currency will be defined in the future, whether it will be treated as a stock, commodity, or currency of its own kind, and if The SEC may regulate it in an aggressive manner as envisioned by Gensler.