Ripple Labs pushed back against the U.S. Securities and Exchange Commission yesterday, saying there was an “absence of fair notice” in the market that XRP would be determined to be a security.

During a pretrial conference yesterday, Ripple’s defense lawyers also questioned the SEC for treating XRP differently from other cryptocurrencies and waiting many years before filing a lawsuit last December against Ripple, its CEO Brad Garlinghouse and Chairman Chris Larsen.

“There is clear evidence that there was substantial uncertainty about the SEC’s interpretation of its own rules, particularly given that it was eight years until the SEC brought this case while XRP was trading in the market, particularly given the 2015 DOJ and FinCEN determination that XRP was a currency, and particularly given that it has determined that bitcoin and ether are not securities,” said Andrew Ceresney of the law firm Debevoise & Plimpton, representing Ripple Labs at the pretrial conference before District Judge Analisa Torres of the Southern District of New York.

In its lawsuit, the SEC has alleged that Ripple’s sale of XRP constitutes an unlawful offer and sale of securities in violation of sections 5(a) and 5(c) of the U.S. Securities Act of 1933. Larsen and Garlinghouse were named as co-defendants for allegedly aiding and abetting Ripple’s violations and making US$600 million in personal profits from the US$1.38 billion sale of XRP in what the SEC contends was an unregistered securities offering.

But Ceresney cited an example of a cryptocurrency exchange that had met with the SEC in 2019 regarding their intention to list XRP, and the SEC did not inform the exchange that it viewed XRP as a security. “In the absence of any clear guidance from the SEC, that currency exchange did its own analysis and concluded XRP was not a security and decided to list XRP,” said Ceresney, who previously served as the SEC’s director of enforcement under former SEC chair Mary Jo White, who is now also representing Ripple.

XRP is one of the top 10 cryptocurrencies in the world with a market cap of over US$24.5 billion. The lawsuit has riveted the crypto industry as the case would not only affect XRP  investors but could also set legal precedents for other cryptocurrencies. 

After the SEC filed its lawsuit against Ripple in December, the price of XRP fell by more than 60%, from close to US$0.60 the month before to US$0.25, and many exchanges delisted XRP. According to Ripple’s Q4 2020 XRP Market’s Report, total XRP sales by Ripple net of purchases were US$76.27 million in the fourth quarter of 2020, from US$35.84 million in the quarter before.

The pretrial conference, together with a nine-page joint letter submitted by Ripple and the SEC to the judge — which outlined the legal bases for the government’s case and Ripple’s defense — provided a window into how the case is likely to unfold in court.

Last week, the SEC also filed an amended complaint “to try to narrow any disputes as to the sufficiency of the allegations.” In the amended complaint, the SEC alleged that the Howey’s test — the legal basis for determining whether a financial product should be deemed a security — is met because Ripple holds most of the XRP in existence, publicly offered and sold XRP, and reasonably led investors to speculate and expect profits based upon its efforts to develop the XRP ecosystem.

Ripple’s CEO “at times described himself as being very, very long XRP” and “Ripple and its executives described themselves as the parties most interested in the success of XRP,” which — the SEC contended in the pretrial conference — made clear that XRP was offered and sold as an investment contract.

The SEC, In its amended complaint, also provided more details regarding the involvement of Larsen and Garlinghouse in XRP sales. “Starting in 2016 at the latest, while he was Ripple’s COO, Garlinghouse began to oversee, direct, and lead Ripple’s efforts to make XRP available for purchasers to buy and sell on digital asset trading platforms incorporated in the United States and abroad,” the complaint alleged. “Ripple and Garlinghouse engaged in these efforts because they believed that making XRP available on digital asset trading platforms was critical to their ability to sell XRP into the market at higher prices — or, as internal Ripple documents explained it, increased trading volume for XRP on digital asset trading platforms would create ‘momentum’ for XRP.”

Ripple is counter arguing that the Howey’s test does not apply as XRP was sold as an asset and is not a security. In an earlier 93-page court filing, Ripple also asserts that XRP “is not a security and the SEC has no authority to regulate it as one.”

See related article: SEC commissioner Hester Peirce says enforcement is never good way to provide clarity

The prospect of settlement is unlikely at this time, according to the joint letter, which included a note by Ripple that “previous settlement discussions took place under a previous administration and were principally with relevant division directors who have since left the SEC.”

But the winds of politics and a new Presidential administration could reshape the litigation yet. The SEC is currently awaiting MIT professor and former chairman of the Commodity Futures Trading Commission Gary Gensler, who has been nominated as the new chair of the SEC, to be confirmed by the Senate. While the Biden administration’s stance towards crypto is not yet clear, Ripple’s Garlinghouse — who previously indicated that Ripple would try to settle the case, has tweeted in response to news of Gensler’s nomination: “We’re ready to work with SEC leadership and the broader Biden administration to chart a path forward for blockchain and crypto innovation in the US.”

Discovery for the case is scheduled to conclude by Aug. 16.

Earlier this month, Ripple Lab’s co-founder and former CTO Jed McCaleb, who subsequently co-founded the Stellar Development Foundation, made news for selling  US$69 million worth of XRP in a week. McCaleb was not mentioned in the SEC lawsuit. 

MoneyGram, the second largest money transfer provider in the world, announced yesterday in its fourth quarter and full-year 2020 financial results that it has suspended trading on Ripple’s platform due to the “uncertainty concerning [Ripple’s] ongoing litigation with the SEC.” In 2020, MoneyGram received US$50.2 million in market development fees from Ripple. 

MoneyGram joins a growing list of companies — including Swipe, and OKCoin — that have stopped doing business with Ripple since the SEC’s lawsuit. Asset manager Grayscale has also liquidated its XRP and dissolved its XRP Trust. But Ripple continues to enjoy strong support in parts of Asia, including Japan.

Ripple and MoneyGram had signed a multi-year contract in 2019. According to a statement by Ripple, the contract with MoneyGram “is still in place and is not limited to their use of ODL (on-demand liquidity” — a Ripple-branded service that allows cross-border payment transfers without a cash deposit).

“We anticipate a path forward to resume ODL w/ MGI. Regardless, we have 2 dozen+ other ODL customers in various stages of production in and outside the US (new customers TBA soon). Everyone take a deep breath!” tweeted RippleNet’s General Manager Asheesh Birla.

XRP’s price passed US$0.60 during Asian trading hours yesterday before the pretrial conference and is currently at US$0.45 as of publication time. The cryptocurrency traded at around US$0.27 a year ago and started 2021 at US$0.23. 

Robert Coventry III contributed to reporting.