The SEC’s high-stakes lawsuit against Ripple has been ongoing for more than three years, but it could wrap up as soon as this month. The outcome could significantly impact the price of XRP tokens and the broader crypto ecosystem.
This article will briefly discuss the long-running case, some latest developments, and how the outcome might affect the crypto industry.
A Brief History
Ripple is a U.S.-based technology company focused on simplifying money transfers across borders. In 2012, Ripple launched RippleNet to enable instant, secure, and low-cost international payments using its native XRP token. In 2013, the company began selling its XRP token to individuals in the U.S. and around the world.
In 2020, the SEC filed an action against the company and two of its executives, alleging that the XRP sales constituted an unregistered digital asset securities offering. The agency accused the firm of structuring and promoting XRP sales to finance the company’s business while noting that the two executives personally sold $600 million worth of tokens.
Ripple argued that XRP tokens are categorically different from securities that Congress authorizes the SEC to regulate. They believe that the functionality and liquidity of XRP tokens are wholly incompatible with securities regulations since requiring registration would impair its main utility of frictionless cross-border transactions.
At the core, the arguments rested on whether XRP tokens constituted a “security” under the Howey test’s definition—namely if it involves “schemes devised by those who seek the use of the money of others on the promise of profits.”
Conflicting Rulings
District Judge Analisa Torres issued a complex ruling in the SEC v. Ripple lawsuit in 2023. The court ruled that Ripple did not break the law when it sold XRP on public exchanges. However, it did break securities laws when it offered $728.9 million worth of XRP to hedge funds and other institutional investors on a “speculative value thesis.”
Other lawsuits could also influence final determinations. For example, in June 2024, Judge Phyllis Hamilton tossed out most of a class action lawsuit against Ripple, but in her ruling, she suggested XRP may, in fact, be a security. In the separate SEC v. Terraform Labs case, Judge Jed Rakoff explicitly disagreed with Torres’ ruling.
On the other hand, in the recent SEC v. Binance case, Judge Amy Berman Jackson ruled that the SEC failed to prove that purchasers in secondary market sales acquired BNB tokens with an expectation of profits rather than for other uses—a key criterion for passing the Howey test. And that ruling could support Ripple’s case.
Ultimately, the Torres ruling stands undisturbed and cannot be challenged in other courtrooms. However, if the SEC appeals its case against Ripple, the agency could use these rulings as an alternative precedent. If the case moves to an appellate court or the Supreme Court, they could use these alternative opinions in arguments.
What’s Next?
The SEC’s case against Ripple continues to drag on amid a disagreement over the penalty for breaking securities laws when selling to institutional investors. While the SEC initially sought a $2 billion fine, it revised the number to $102.6 million earlier this year. However, Ripple aims to pay no more than $10 million in penalties.
After Judge Jackson dismissed the SEC’s claims that secondary market sales of Binance’s BNB tokens were securities transactions, Ripple filed a Notice of Supplemental Authority, arguing that it supports its case that alleged illegal sales of XRP don’t warrant the “harsh remedies” that the agency aims to impose.
The SEC swiftly responded that Binance’s case is “wholly irrelevant,” saying one observation in the 90-page Binance ruling can’t be generalized to any securities-related case. However, ultimately, the decision will rest with Judge Torrez after she considers both sides of the argument over the coming months.
While there’s still a vast gulf between the SEC and Ripple’s demands, experts believe the case may soon conclude. Fred Rispoli, an attorney supporting Ripple, anticipates that Judge Torres will deliver a ruling on the penalties in the SEC v. Ripple lawsuit in July. A trial is unlikely because the damages the plaintiff can win at this point are very small.
Long-term Impact
A final decision could significantly impact Ripple’s XRP, which rose sharply higher following the legal victory in July 2023. The token’s price soared as much as 80% in the aftermath of the initial court victory, bringing its then-valuation to over $41 billion. The court’s ruling also helped boost other cryptocurrencies.
XRP prices have trended lower over the past year. Source: CoinMarketCap
However, despite a potential legal victory, the lack of legal and regulatory clarity for crypto means that district judges can issue different opinions. While judges can take guidance from other court decisions, they aren’t obligated to follow that guidance until a decision is made by a higher court, like an appellate court or the Supreme Court.
Beyond Securities
The regulatory uncertainty surrounding the crypto industry goes well beyond the SEC’s classification of securities. In particular, the IRS’ treatment of digital assets remains uncertain in key areas, making it challenging for taxpayers to file accurately.
For example, the IRS has not issued clear guidance on whether using cross-chain bridges triggers capital gains taxes. When using a cross-chain bridge, crypto users lock one crypto asset and receive another on a separate blockchain. And depending on interpretation, that might constitute a “sale” of the original asset.
The broad interpretation of all cryptocurrencies as “property” also limits the utility of cryptocurrencies for other purposes. For instance, every time you purchase a coffee with Bitcoin, you need to record the price of Bitcoin at the time of the purchase (e.g., when you sold it) and report your capital gain—making it somewhat impractical as a “currency.”
For these reasons, most crypto traders and investors take a conservative stance when filing their taxes. In addition, it’s a good idea to use crypto tax software, like ZenLedger, to aggregate transactions across exchanges and keep a detailed record. That way, you can defend yourself in the event of an IRS audit with minimal effort.
The Bottom Line
The SEC’s case against Ripple is one of the longest-running and most consequential trials facing the industry thus far—and it’s coming close to a conclusion. While Ripple seems likely to experience a victory in the end, the case won’t close the book on whether a cryptocurrency constitutes a security due to differing opinions among judges.
In the meantime, crypto traders and investors can avoid their own legal battles by complying with IRS rules and regulations. While these aren’t necessarily cut-and-dry, ZenLedger and other crypto tax software can help ensure compliance.
Our platform aggregates transactions across exchanges, computes your overall capital gain or loss, and generates the paperwork you must file yearly. You can also use our tax loss harvesting feature to find opportunities to save throughout the year while accessing a Grand Unified Accounting spreadsheet to support your accountant.
We recently launched the ability to file all your taxes through ZenLedger, making it easier than ever to complete your taxes accurately and on time each year.
The above is for general info purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.
