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Development of US Lawsuit Against Ripple

The US Securities and Exchange Commission had not been kind to cryptocurrencies last year. In March 2020, the Commission won a global injunction against Grams’ proposed broadcast by Telegram. It undid years of groundbreaking work even in the absence of fraud allegations. Then, on the last day of September 2020, Judge Alvin K. Hellerstein dashed Kik Interactive’s hopes by ruling in favor of the SEC’s motion for a summary judgment in SEC against Kik Interactive, halting the sale of Kin cryptocurrency tokens. Both actions were filed in the Southern District of New York. On December 22, 2020, the SEC decided to initiate another high-profile action. It filed in the same district against Ripple Labs for raising more than $1.38 billion through the sale of XRP since 2013.

The initial consequences of this action have been swift and dire. In fact, 24 hours after the lawsuit was filed, the price of XRP dropped almost 25%. This still left XRP in fourth place on CoinMarketCap, with a total market capitalization of more than $10.5 billion.

Ripple’s response to the SEC’s action

Ripple’s response to the SEC’s enforcement action came before the SEC’s filed an official lawsuit. On December 21, Garlinghouse tweeted condemnation of the SEC’s planned move. It criticized the agency for choosing favorites and limiting American innovation in the cryptocurrency industry to BTC and ETH. Soon after, Ripple’s general counsel Stuart Alderoty gave a strong indication of how the company was likely to respond on the pending matter by pointing to the 2015 FinCEN issue. He claimed it was a government determination that XRP was a digital currency rather than a value under the Howey test.

Unfortunately, classification as a digital currency does not necessarily exclude regulation as security. As another New York district court ruled in the 2018 CFTC v McDonnell case, in the context of the Commodities Futures Trading Commission’s authority to regulate digital assets, Federal agencies may have concurrent or overlapping jurisdiction on a particular topic or area.

Therefore, although FinCEN regulates cryptocurrencies as a digital asset, the CFTC can treat them as commodities. The SEC can regulate it as a security, and the Internal Revenue Service can tax it as property. All at the same time.

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