The SEC has filed a lawsuit against Ripple Labs Inc. (the company behind the XRP digital token) by collecting $ 1.3 billion in unregistered “digital asset securities.” Although there has been an important short-term price movement in terms of bitcoin, ethereum and XRP prices, more important implications can be played out in the long run. It is worth examining what all this means for cryptocurrencies and how theoretical and practical discussions on decentralization are already taking place.
As always, this is not legal advice of any kind, but rather a passage and a little deeper analysis of the news.
The director of the SEC believes that bitcoin and ethereum are not securities for now
Speaking at the Yahoo Finance All Markets summit on cryptocurrencies, William Hinman, director of the SEC’s Corporate Finance Department, specifically pointed out that he doesn’t think ethereum and bitcoin are securities.
In particular, he said that “when I look at bitcoin today, I don’t see a central third party whose efforts are a key deciding factor in the company.” He used similar logic to describe ethereum in its current state. The degree of decentralization he observes makes a critical difference in the number of actions he can take – there is no CEO or body that has enough power in bitcoins to enforce civil lawsuits, which is unlikely to even radically change different leadership. With Ripple and XRP, this is clearly not the case.
While this is not a final verdict and it was a speech by someone in a separate department from the SEC Enforcement Branch, it still gives little insight into how some people in the SEC think about these things.
It seems unlikely based on that thread of thinking that the SEC, responsible for securities regulation, will go for bitcoins or ethereum, except when used in ICOs or other offers similar to security.
In this case, however, the relationship between parent company Ripple Labs and the XRP token it provides is what it is – and it seems clear that the SEC is investigating just that connection.
Previous SEC actions
The SEC has set out in search of people who have previously offered what they classify as securities in the digital asset space. Kik, a chat application company, was forced to pay a $ 5 million fine and notify the SEC of any future sales of digital assets in the next three years in 2017.
The U.S. District Court for the Southern District of New York ruled that Kik’s sale and the proposed ICO “Kin” were selling investment stocks and thus violated federal securities laws. The Telegram agreed with the SEC to pay a $ 18.5 million fine, while returning $ 1.2 billion to investors. The creator of EOS Block.One was forced to settle for a $ 24 million fine, although they eventually raised about $ 4.1 billion through EOS.
The SEC has a special page for ICOs, with updates on various fees, from publishers to promoters – including allegations made against John McAfee for promoting the ICO.
This latest action against Ripple and XRP is simply targeting the largest digital book asset they could have if ether and bitcoin were not securities – as published in this article, XRP was the third largest digital book asset by market capitalization on CoinMarketCap.
The most likely outcome seems to be a similar civil penalty or settlement as EOS, but that will depend on a lot of different variables – including how much Ripple already looks ready to fight. The EOS settlement was announced after the fact, while the announced accusations now indicate that the negotiations have been stopped and that a fight between Ripple and the SEC is inevitable.
Ripple fights back
Ripple looked ready to fight from the start. He prevented the official announcement of the SEC with the executive director, Brad Garlinghouse tweeting ahead of an official announcement with media mentions in the Wall Street Journal and Fortune that the SEC had “voted to attack cryptocurrencies”. It seems clear that Ripple will be combative and allocate some of the funds raised by XRP to fight this case – and the case may take longer with more significant penalties than with Kik, EOS or Telegram.
The SEC was quite aggressive with this suit. They cited individuals (including CEO Brad Garlinghouse) as part of the lawsuit – specifically accusing him of earning $ 700 million in personal income.
Bitwise, a cryptocurrency fund, has already liquidated their XRP fund over this lawsuit. OSL is the Hong Kong Stock Exchange which suspended all XRP payments and trading “immediately and until further notice”.
It is possible that the most effective effect will have the removal of XRP from common stock exchanges such as Coinbase. They will be full of the sale of unregistered securities and related penalties, as well as further rejection by cryptocurrencies. This could lead to price shocks and liquidity problems for XRP. That may be why, among other reasons, Ripple is fighting so fiercely – both against the SEC and against cryptocurrencies.
“Chinese control” of bitcoin and ethereum
Part of Ripple’s argument was to fight the regulatory “duopoly” of ethereum and bitcoin – arguing that “China” controls both and that U.S. policy should be more tailored to the parent company based in the country. This is a long-term thread in which Brad Garlinghouse claimed for many years that the People’s Republic of China “really controls” bitcoin.
However, this risks alienating cryptocurrency communities, along with Vitalik Buterin already commenting on this approach in a negative way. Undertaking the projected unity movement and attempting to turn the U.S. government against bitcoin and ethereum is unlikely to win XRP many new fans in the cryptocurrency space.
Moreover, argument about the concentration of the mining basin is more subtle than directly linking mine pools to the Chinese state or assuming loyalty to a mining pool is illiquid.
While there will be a short-term sense of price (Ripple has already lost about $ 2 billion after the news), the long-term effect could be a wider shake-up and the difference between ICO products and digital tokens resembling analog management models from earlier versus truly decentralized node management modes.
This could lead to companies that have elements of the Ripple / XRP model further avoiding the US legal system and settling elsewhere – and people could think very clearly about the implications of their governance on the problems they are trying to solve. .