The Ripple Labs lawsuit is still underway. Next week, it could take one of its most dramatic turns yet. The U.S. Securities and Exchange Commission is seeking to have the judge overturn her own ruling — that the SEC had to hand over a pile of documents related a speech by one of its top managers. In the speech, the SEC’s director of corporate finance, William Hinman, declared that cryptocurrencies were not securities. The SEC is suing Ripple on the grounds that the company’s token, XRP (CRYPTO:XRP), is a security. The SEC wants Hinman’s comments saying otherwise stricken from the record. Judge Analisa Torres has already ruled that these comments are to be revealed in discovery. We may hear whether she’s willing to reconsider her previous ruling as soon as next week.
What’s at stake The SEC is currently suing Ripple Labs on behalf of 65,000 plaintiffs. The alleged misdeed on Ripple’s part is selling securities without registering them. If the SEC wins, then Ripple will have to pay back the money raised in its token sale. That would mean having to come up with $1.3 billion.
Why does this matter? First of all, there are clear implications for Ripple itself. Having to pay out $1.3 billion would likely bankrupt the company. It is not clear that it would have the resources to continue building and maintaining XRP after such a burden was imposed. Development on XRP-related projects would perhaps stall, harming people who hold the coin.
Secondly, and perhaps more importantly, the case could set a precedent that would dictate the future of cryptocurrency in the United States. If XRP is a security then Ether and others are as well. Pretty much any cryptocurrency that has ever had a major token sale would be considered a security. As such, the developers of these tokens would have to file reports, disclose holdings, and get regulatory permission before going to the public. All of this compliance costs money. Banks notoriously spend billions of dollars and countless hours on compliance every year. Were every crypto developer subjected to those rules, the crypto space would face a real problem. Upstart (NASDAQ:UPST) crypto projects don’t have unlimited resources.
Why Ripple thinks it’s going to win Ripple has made it pretty clear that it believes it will win its lawsuit. It has scored a number of procedural victories. One of the biggest was forcing the SEC to hand over Hinman’s speech. This is the “win” that the SEC is seeking to have overturned. If they fail to get Judge Torres to backtrack on her previous decision, then the Ripple lawsuit will proceed with piles of testimony from SEC officials saying that cryptocurrencies aren’t securities. This would make the SEC look bad because it would show that, just a few years ago, they didn’t even believe what they are now trying to prove in court.
It looks like the SEC has got a tall order on its hands. Not only are there countless statements from their own people undermining their case, there are also ex-SEC officials who have flat-out bashed the lawsuit. Just recently, a former SEC lawyer came out swinging, saying that the lawsuit should never have even been filed. It doesn’t even look like there’s a consensus among SEC-affiliated people that this case has merit. That may be a positive for cryptocurrency investors, who don’t want their tokens regulated as securities.
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Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool owns and recommends Ethereum.