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The Securities Exchange Commission (SEC) of the US filed a class action targeting Ripple Labs Inc. and two of its key executives on 22 December 2020. The legal action was about the allegations of a perceived continued fraudulent trade in XRP as determined by a three-person investigation team of the SEC’s Cyber Unit.
The filed lawsuit alleged that the two executives raised over $1.3 billion via the continued sale of unregistered crypto assets. The two ripples, the co-founder and former CEO, and the current CEO, hold substantial securities in the firm. Hodlers of the coin may be wondering, do they brave the lawsuit out and HODL XRPs, or does this warrant a sell response from them?
The Lawsuit’s Nature
To better gauge the charge’s potential consequences, it’s prudent for one to be familiarised with the nature of this lawsuit, the complaint being filed by the SEC, who does it specifically target, and finally, what does the SEC seek as justice for the transgressions?
Charges Tabled by the SEC
According to the SEC, a violation of the registration provisions of the Securities Act of 1933 was and is still being done via the raising of Ripple funds. The process has been ongoing since 2013 via the global sale of unregistered digital securities called XRP, the company’s native digital asset.
Besides, many XRP amount to billions being distributed for market developmental services and labor, both non-monetary considerations. Also, the personal sale of unregistered XRP cryptos without a sufficient justification for their omission from registration has been observed. The latter, amounting to $600 million, is in direct contravention of federal laws governing securities.
Defendants Targeted by the Charges
According to the SEC’s filings, Christian Larsen, the company’s co-founder, board’s executive chairman, and former CEO, Bradley Garlinghouse, the company’s current CEO, is charged with being in contravention of the Securities Act. They did so via raising capital to finance the company’s business through unlawful means. The two are also charged with the subsequent personal sale of $600 million worth of unregistered XRP.
Ripple’s top executives are also charged with having not registered billions worth of XRP sales to retail investors. As a result, sufficient information regarding XRP and its parent company’s business model is withheld from likely buyers.
In line with the 1933 securities act, the SEC’s filings on this case illustrate that the commission seeks “injunctive relief, disgorgement with prejudgment interest, and civil penalties.”
In other words, the SEC is seeking a court order prohibiting Ripple and the two executives from carrying on with the alleged illegal activities. A continued global sale of unregistered XRP coins is the alleged illegal activity in question. It also wants to keep the debtors from getting rid of their property until a judgment, preferably requiring a refund of the alleged illegally obtained funds by the defendants, is passed.
Repercussions of the Lawsuit
The effects of the SEC’s lawsuit to date have been quite profound. The XRP price and liquidation levels, as well as the number of exchanges it’s listed on, have been quite affected.
Effect on XRP Price and Liquidation
Just four days after the SEC’s announcement, the token price tanked by a whopping 63%. The graph below by Coindesk illustrates this phenomenon well.
The end of November’s preceding month had seen a surge in liquidation and huge price gains in light of a planned token airdrop event. XRP holders received a portion of the new Spark token, spurring an upswing in the coin’s purchase by investors hence the price surge. More experienced investors also accumulated XRP in anticipation of the retail-led bull market.
About $350 million worth of futures were liquidated on the lawsuit’s announcement in just two days. Ripple co-founder Jed McCaleb sold over $120 million worth of XRP, a figure several times larger than that of preceding months. The initial surge in XRP purchases and the later offloading has led to about $1.5 billion of XRP features being liquidated since November. Its price volatility is also at its highest levels since 2018 as a result.
Effect on Crypto Exchanges
Following the charges’ announcement, several crypto exchange platforms developed shifty feet regarding the listing of XRP. Three exchanges, Crosstower, Beaxy, and OSL, opted to drop XRP support. A fourth, Bitstamp, announced it would stop all XRP related services for its US-based customers from the 8th of January, 2021.
Further Potential Repercussions
The charges were tabled when the SEC was going through a change in leadership. The body now has a new acting commissioner. Both executives hold the view that the lawsuit could potentially harm the coin holders further. The outgoing SEC commissioner noted that initiating the lawsuit was bound to impose harm to innocent XRP holders, regardless of the case’s ultimate resolution. He rightly predicted intermediaries would halt the transactions of its features, whereas its liquidity and value will also plummet.
The new acting commissioner sees the need to re-examine SEC rules to ensure they accomplish set missions. This view is in light of new technology like blockchain and coin offerings.
The crypto community closely observes the lawsuit against Ripple. There are mixed reactions from traders. Some believe the lawsuit’s effects on XRP are temporary, while others think it will stagnate from now henceforth.
Parallels have been drawn between this lawsuit and the one filed against Block.One of the EOS ecosystem. It’s worth mentioning that Block.One had a $24 million settlement with SEC. It was before there was active litigation. The token under charge also wasn’t the blockchain’s native asset. As a result, while a complete ecosystem collapse is improbable, user discretion is advised regarding continued XRP hodling.