Ripple intends to prove that XRP is not a security and does not benefit from its parent’s business
The U.S. Securities and Exchange Commission (SEC) lawsuit against Ripple Labs cast a shadow of uncertainty for XRP and the entire cryptocurrency industry. The regulator accuses the payment solutions company of making an unregistered sale of a security, the XRP token. However, Ripple is defending itself before the February 22 pre-trial conference.
a Yahoo! report Finance explores possible arguments that Ripple can use to oppose the SEC’s allegations. The report cites sources close to the payment solutions company’s legal strategy and establishes XRP’s price performance as a central line of argument.
According to 8 years of data, the price of XRP has not changed in relation to the news related to Ripple’s partnerships. For example, the report states that the announcement of the cooperation between Ripple and MoneyGram brought benefits to the actions of this second entity, but did not have an apparent positive impact on XRP.
In comparison, MoneyGram’s shares appreciated 170% in 24 hours after that announcement and the XRP remained “stable”. However, CoinMarketCap data cited in the report indicates that there was a 15% increase in the price of XRP. With this argument, Ripple seeks to establish that there is no relationship or benefit between the company and the token that they classify as a decentralized asset.
The SEC may dispute that Ripple may have marketed the XRP in such a way that investors associated the company’s success with the token. In this regard, the report states that, after its registration, Ripple referred to XRP as “ripples”. The source cited classifies this as “a false clue” and considers it unfair that the lawsuit was filed in the current political situation in the United States.
SEC relies on ICO precedent to sue Ripple
In theory, the SEC’s strongest argument is the precedents set by lawsuits against Initial Currency Offers (ICOs) from companies like Telegram, AirFox, Paragon and others. Ripple can argue that its business model is based on offering solutions to facilitate payments to a global customer base of more than 500 entities and companies, not on selling XRP.
In that sense, the “Howey Test” will be the key to prove whether XRP qualifies as a security under US law. This instrument allows the SEC to determine whether an investment derives its value from the allocation of funds “made in a company with the expectation of profit from the efforts” of a third party. About this, Ripple stated the following:
“The SEC’s theory, that XRP is an investment contract, is wrong about the facts (…) amounts to an unprecedented and ill-conceived expansion of the Howey test and the SEC’s enforcement authority against digital assets.”
In addition, the payment solutions company is relying on a U.S. Supreme Court decision that ruled that the Howey Test must be “flexible, rather than static” and adaptable to the various new “schemes” and markets. For now, the regulator considers that the XRP does not pass the “flexibility” test.