The case between Ripple and SEC: What is happening and how it might impact the DeFI Space?
Things are looking up for the DeFI Space in the first half of 2023 with Digital Asset value prices continuing to rise and making a comeback after a horrendous 2022. Amongst all the good news within the DeFI Space, Ripple (XRP) seems to be the center of attention recently with its long battle with SEC drawing to a close in 2023. Let’s take a closer look at the fight between Ripple Labs and the SEC that unfolded this year. Will this produce a more considerable impact on the future of the DeFI Space?
An Unclear Regulation that eventually caused a Confusion
The DeFI Space has grown largely over the years due to the rise in popularity of Bitcoin but it also created opportunities for other Digital assets to join in such as Ethereum, Litecoin, and Namecoin just to name a few. It was around this time that three developers David Schwartz, Jed McCaleb, and Arthur Britto in 2011 launched a new cryptocurrency called “Ripple (XRP)” to improve the limitation of the Bitcoin Blockchain.
Ripple (XRP) is the product of RippleLabs which is a for-profit company that aims to serve the banking system and ease cross-border global payments. Ripple(XRP) remains the oldest digital asset that existed in the DeFI Space and utilizes a “Unique Node List” system to verify transactions within the blockchain. At the time of its introduction in 2012 when there were fewer DigitaL Assets available, Ripple (XRP) with its fast transaction speeds was highly demanded amongst users for cross-border remittances transfer.
Ripple (XRP) has a tokenomics of 100 Billion out of which 20 Billion goes to the founder, 40 Million goes to RippleLabs and the rest goes to Institutions/Individuals. Another product of RippleLabs is RippleNet or usually called “xcurrent” which uses Ripple as a payment system. Ripple currently has a transaction speed of more than 1500 transactions/second and a fee of less than a penny which makes it attractive for users to send international payments.
It currently has more than 100 international banks interested to use the “xcurrent” system including American Express as an alternative to the current SWIFT system which takes a lot of time to be process and costly but all progress was halted when the SEC sued Ripple at the end of December 2020. The SEC claims that Ripple was selling their cryptocurrency XRP as a security or stock without registering beforehand with the SEC.
This claim that Ripple is considered an Unregistered Security Offering was based on the 4 criteria of the “Howey Test for Investment Contract”. Initially, every cryptocurrency out there would meet the first 3 criteria in which it is an Investment using Money, The Price is the same for every Investor and There is an Expectation of Profit but it’s the 4th criterion that raises a doubt. The 4th criterion was “There is an Expectation of Profit from the Third Party” initially just like a stock providing dividends to its investor.
Although the Ripple defense team focus the case more on fair notice as they were not aware of these criteria being applied to cryptocurrency, SEC claims otherwise to point out that Ripple was aware of this as it also focus on crackdown others from the cryptocurrency sector including Coinbase. It is also fair to point out that the 4th criterion of the Howey Test claims to differentiate between what is considered a commodity and securities.
The focus of securities in the DeFI Space is also considered through ICO or Staking which represent the investors owning part of the company. In Ripple’s case, the creation of the Cryptocurrency XRP predates the creation of RippleLabs by a year and there was no ICO in place for its sale. It’s also important to point out that Ripple’s “Unique Node List” system provides different from the normal POW or POS system used by other digital assets as in this system, there is no staking or mining fee provided for validating the transaction. The founders of Ripple (XRP) gifted 80% of its supply to RippleLabs for the development of the company.
The Judge focuses on the sale of Ripple (XRP) in 3 categories; the sale to institutions amounting to $728 Million, the sale to exchangers amounting to $757 Million, and the sale to the secondary market including employee compensation amounting to $609 Million. It was also reported that Ripple CEO Brad Garlinghouse, and Ripple Co-Founders Chris Larson and Jed McCaleb also sold millions of XRP to the exchangers.
Although there are a lot of points that were picked up for discussion, the ruling concluded that XRP as a digital token is not in and of itself a “contract transaction or scheme” that embodies the Howey requirements of an investment contract. The judge also ruled that Ripple’s sale to institutions is considered an unregistered security offering due to Ripple being the third party that provided the profit and Ripple Lab could be on the hook for a fine for this sale. While Ripple and its executives’ sales to exchangers plus the secondary market will not be considered an Unregistered Security Offering as it is assumed that there is no expectation of profit there.
Some say that this can be considered a win for Ripple as it has finally obtained clarity in terms of regulation for XRP and quickly rose to become the 4th largest crypto in the market but no one may know as the case still leaves a lot of unclear precedent. The case still awaits its conclusion possibly in 2024 but with an unclear crypto regulation in the USA, the SEC could decide to appeal and change the ruling before then. What is clear is that these long drawn-out cases provided some clarity for Ripple (XRP) and other digital assets in the market but what could be the impact of these rulings on the DeFI Space?
The Path Forward for Ripple and the DeFI Space
It has been 3 long years for Ripple due to this case from being the pioneer in solving a problem with the banking system to the SEC case that caused them to be delisted from major US exchanges. What is the obvious impact for Ripple is that its appeal to investors should rise as it becomes clear in terms of regulation and being relisted back to major exchangers but in those times Ripple was gone, many competitors have stepped up to fill in the gap including Stellar Network which is a large player in its field.
Ripple’s ruling should also benefit the major exchangers as digital assets could no longer be allowed to sell through Venture Capitalist or OTC. This will mean that more of these OTC sales will flow through major exchangers which helps provide more liquidity in the market. This also is good news for investors as there will be fewer case of digital tokens that are quickly listed and dumped once it reaches the exchanger as the ICO process becomes more regulated.
The case of Ripple and SEC also brought a sting and attention for the larger DeFI Space as more digital assets and exchangers could face scrutiny. Some of the points that brought a sense of victory with Ripple might not be so applied to other cases such as Coinbase, Polygon, and Solana that are currently facing scrutiny. Ripple and Bitcoin might only be the few ones that do not go through ICO nor have any staking process in place so this could mean a rough period ahead for the DeFI Space.
This also means that the “Howey Test” will be used more frequently within the DeFI Space to assess if the digital asset falls into the securities category. All in all, this is great for the DeFI Space which has so long operated in some sort of gray area within the USA and these rulings could be the basis for a better crypto regulation coming from the world’s number 1 country. What can be done now is to hope that more regulation will take place so more projects and institutions can develop with the clarity of regulation in place for the years to come!
We at Nagaya Technologies Pte Ltd. surely believe that a proper regulatory framework could help provide the structure needed for the Crypto Space to operate efficiently. This resonated in our principles which are to provide Legality and Transparency to our holders to promote trust and value. Our vision is this should not only create trust but also value for the stakeholders of our Hybrid Crypto Asset. To know more about Nagaya Technologies and the world’s first hybrid cryptocurrency, you can read our whitepaper through our website at nagaya.io
Or you can talk to us at t.me/nagayaofficial
