The regulatory dispute between Ripple and the SEC is about to come to an end. Who is more likely to win?

Recent news indicates that Ripple's legal dispute with the United States Securities and Exchange Commission ( SEC ), which has lasted for more than two years, is expected to come to a conclusion in June or July of this year. This highly anticipated case will not only affect the future direction of cryptocurrency regulation in the United States but may also change the landscape of the entire crypto market.

As a result of this case, the price of XRP has recently experienced significant fluctuations. Last week, the price of XRP rose sharply, attempting to break through a key support level. However, this week the price of XRP has plummeted, falling below the lowest level since March. Clearly, this pending lawsuit is a key factor affecting the price trend of XRP. As the case approaches its conclusion, market sentiment has become increasingly unstable, and investors are paying more attention to the final outcome of this protracted battle.

Ripple and SEC's three-year lawsuit finally comes to a conclusion

This dispute dates back to 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 and profited from it, which constitutes securities trading, but Ripple did not register XRP as a security. According to federal securities law, all securities issuance and sales, including those involving digital assets, must be registered or exempt from registration requirements.

As early as 2019, the SEC released the "Framework for 'Investment Contract' Analysis of Digital Assets" based on the Howey Test to determine whether digital assets are securities. The SEC believes that if the development of a cryptocurrency relies on the efforts of a particular company and investors expect to receive reasonable profits from their investment, then such cryptocurrency will be considered a security. Conversely, if a cryptocurrency is sufficiently independent and decentralized, such that no participant can influence its operation and investors do not form expectations of profits, then such cryptocurrency would not be classified as a security.

This analytical framework is not formal law, but rather provides regulatory expectations for cryptocurrency companies. Under this framework, XRP, a relatively centralized currency, can easily be classified as a security. However, Ripple maintains that XRP should not be considered a security as a cross-border payment tool.

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

SEC Chairman Gensler believes that the SEC has the authority to determine which digital assets are considered securities, and stated that the existing securities laws already cover most activities in the crypto market. He believes there is no need for legislative action to make this determination. In contrast, Ripple CEO Brad Garlinghouse insists that such decisions should be based on legislation, rather than the personal views of the SEC Chairman.

At the beginning of April, Gensler stated on social media that the crypto market is not incompatible with securities laws. The SEC's goal is to ensure that the crypto space complies with securities regulations, providing digital asset investors with the same protections as those in other markets. However, Ripple's policy chief, Susan Friedman, believes that there are essential differences between cryptocurrencies and securities, and that specific rules need to be established rather than a one-size-fits-all regulatory approach.

Recently, experts have predicted that the SEC's lawsuit against Ripple will have 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 issue of long-standing debate between the two parties is whether "the issuance of XRP is for the purpose of sale." From a broader perspective, the dispute actually involves the question of "who has the authority to determine whether a digital asset is a security." This is a matter of vital interest for cryptocurrency companies and exchanges; for U.S. regulators, it is a power struggle over regulatory authority. The outcome of this dispute will set the tone for future cryptocurrency regulation in the United States and will also impact the development direction of the entire cryptocurrency market. Therefore, a victory for either side will inevitably compress the rights space of the other party, which is also the reason for the long-standing stalemate.

On April 20, a report investigating Ripple's business practices attracted widespread attention. The report revealed that Ripple sold a large amount of XRP through its primary partner in Malaysia and pointed out how Ripple used data embellishment to market its core business.

As we all know, cross-border payment is the core business of Ripple, which is divided into two business lines: one involving XRP and the other not involving XRP. However, only the business line involving XRP is truly profitable. There is a viewpoint that Ripple has achieved rapid growth by promoting the liquidity payment technology (ODL) of XRP. In response, Ripple's Chief Technology Officer stated on social media that what Ripple is doing is simply to enable broader application of XRP, not for the purpose of selling for profit. He indicated that Ripple is able to profit from it and maintain operations simply because it is lucky enough. Therefore, it is difficult to make a clear determination on whether "XRP is intended for sale" in such businesses.

Gensler's strong stance is not only to compete for cryptocurrency regulatory power, but also because he is dissatisfied with the increasingly complex operating models of cryptocurrencies. He believes that complex operating models are more likely to breed regulatory gray areas. Gensler criticized the compliance of cryptocurrencies during his testimony in Congress and expressed concerns about the regulation of stablecoins. He stated that he has been in the financial industry for 40 years and has never seen a field so non-compliant with securities laws. He also confirmed that if cryptocurrency tokens are considered securities, any exchange trading such tokens would need to register as a national securities exchange and be subject to SEC regulation.

Gensler's attitude towards regulation is extremely tough, insisting on maintaining the existing regulatory guidelines without making significant changes. He believes that the digital asset market needs to be more compliant because it seriously jeopardizes investors' interests and undermines public trust in capital markets, potentially threatening investors' lifelong savings. On the other hand, Ripple believes that once XRP is classified as a security, it will need to undergo strict regulation, which to some extent could stifle crypto innovation. Both sides hold their own opinions and have been unable to reach a consensus.

The lawsuit between Ripple and the SEC also reflects the current state of the U.S. cryptocurrency market: an emerging market that still has many gray areas in legislation and regulation. The scope and responsibilities of regulation are unclear, and the expectations of crypto companies towards regulation are also unstable. The crypto market still needs a clearer regulatory framework to reduce potential market chaos, and the outcome of this lawsuit may become an opportunity for cryptocurrency regulatory reform.

Which side is more likely to win?

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

Due to the cryptocurrency market's sensitivity to various information, the price of XRP can to some extent reflect investors' sentiments regarding the lawsuit. Earlier reports suggested that Ripple might win in its lawsuit against the SEC, and subsequently, the price of the XRP token rose by more than 20% within 24 hours. Recently, the price of XRP surged, with some analyses suggesting that this is because certain well-known internet celebrities and influential figures expressed support for the imminent conclusion of the Ripple-SEC lawsuit, believing that Ripple is very likely to win in the lawsuit, which in turn has driven up the price of XRP.

However, a lawyer involved in the lawsuit believes that the SEC and Ripple lawsuit may end in a draw. The reason is that the SEC's own expert acknowledged that since mid-2018, the price fluctuations of Bitcoin and Ethereum can explain up to 90% of the XRP price fluctuations. At the same time, the SEC argues that Ripple Labs' high holding of XRP means that XRP is centralized and should be considered a security. There is a contradiction between these two statements and positions.

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