Ripple Labs is one of the world's foremost blockchain-focused companies. However, like every industry leader, the firm has had to deal with a great deal of controversy. Now, it is embroiled in a legal case that could very well be a gamechanger for the crypto industry.
There have been few relations between regulatory agencies and crypto firms in the past. However, this one could bring a fundamental change to the industry's stance before financial regulators.
The SEC Comes After Ripple
In a landmark filing last week, the Securities and Exchange Commission (SEC) presented a lawsuit against Ripple Labs over its handling of its in-house token, XRP. The case, submitted at a federal court in Manhattan, alleged that XRP is a security and that Ripple essentially engaged in an unregistered securities offering for its XRP Initial Coin Offering (ICO) back in 2013.
The SEC added that Ripple had distributed XRP for "labor and market-making services," adding that Chris Larsen and Brad Garlinghouse, two of the company’s top executives, of deliberately failing to register their XRP sales, valued at about $600 million.
Regular SEC laws dictate that companies and individuals must register their offerings with the agency or get an exemption for their securities. However, there have been arguments about what could qualify as tokens in the crypto space.
The crypto industry has been waiting for regulatory agencies in the United States to clarify cryptocurrencies' regulatory status for years. Now that the SEC is coming after Ripple and XRP, it appears that the agency is getting more serious about its regulatory duties – especially concerning the crypto industry.
What Happens Now?
It is too soon to say what this lawsuit will bring for sure. Ripple is fighting back, with Garlinghouse arguing in a blog post that the company is in a good position to win. In the blog post, the CEO asserted that the SEC is launching a full-frontal assault on the crypto space.
As Garlinghouse explained, success with this lawsuit will encourage the SEC to regulate major altcoins under the "securities" tag. By placing crypto companies under significant oversight, the SEC could stifle innovation in the industry and break the cardinal rule of censorship-resistance on which built the crypto industry.
Garlinghouse isn't entirely wrong. The SEC has had a long history of roaring to life regarding the crypto space and being ruthless. Most notable is the agency's case against Telegram, the famous mobile messaging platform.
Telegram was set to launch its GRAM token and Telegram Open Blockchain (TON) last year. However, a week before the launch, the SEC accused the company of launching an unregistered security. In its lawsuit, the SEC alleged that the GRAM tokens were a security, and that Telegram had broken the Securities Act of 1933 and violated significant securities statutes.
While Telegram fought back with its own lawsuit, the battle raged on for months. Telegram eventually withdrew its lawsuit in May, marking its defeat. A press release from the SEC confirmed that the London-based company would pay $1.2 billion to investors in the token and blockchain project.
The Telegram case was a precursor for what was to come. However, instead of getting Ripple to pay a mere fine, a victory for the SEC would most likely mean the agency will move to classify other major altcoins as securities as well.
Ripple Loses Support
While Ripple is putting on a brave face, the company is losing support from many in the crypto space. XRP's price fell by 63 percent in four days following the lawsuit's announcement, and several top names in the crypto industry have abandoned it too.
Last week, Bitwise Asset Management, one of the top asset management firms in the crypto industry, announced that it had closed all XRP investments in its Bitwise 10 Crypto Index Fund. The company explained that it divested itself of its XRP holdings in response to the case.
The Bitwise fund launched in 2017, providing institutional crypto investors with more exposure to the asset. It is unclear what percentage of it was in XRP, but that is gone now.
Along with Bitwise, exchanges have also begun delisting XRP. Hong Kong-based OSL, New York-based CrossTower, and Chicago-based Beaxy have announced that they would stop all XRP-related activity on their platforms.
There is always the chance that more exchanges will delist XRP before long. However, for now, Ripple Labs is embroiled in what could be a battle for the crypto industry's soul.