Class Action Against Ripple: A Comprehensive Guide
Cryptocurrencies have always been a difficult legal problem for the United States. As their use exploded in the late 2010s, governments all over the world scrambled to work the decentralized currencies into their own lawbooks.
In particular, regulations targeting Bitcoin have long been on the agenda of the United States Congress. But thus far, the only significant regulatory action comes in the form of an official statement by the U.S. Securities and Exchange Commission regarding the trade of coins in Initial Coin Offerings.
One of the biggest obstacles to successful regulation of the cryptocurrency market comes from the very nature of a cryptocurrency. Because it is both anonymous and decentralized, coins like Bitcoin do not belong from a single country.
In fact, the origin country of blockchain technology is even unclear—as is the exact identity of the genius mind behind it.
This is a consideration of considerable consequence for the United States government; regulating the trade of currencies that are both not fiat and not originating within the U.S. borders is a tricky subject.
And even if the intent to regulate were fleshed-out and agreed within both the house and the senate, there is no guarantee that partisan lines will converge on the issue of cryptocurrency. It is very likely that any bill regarding cryptocurrency in the house would be sent to the bottom of the pile, or not debated at all.
Some economic analysts, however, are steadfast in their conviction that cryptocurrencies are the next thing to be regulated by the government. If this monumental shift in economic policy is going to happen, something must give.
A grid-locked congress seems to have no clear interest in blockchain technology. The only route to successful regulatory precedent, then, must come from the judiciary branch.
Until now, there has not been a court case in which a cryptocurrency company is defendant to a claim of illegitimate security sales as a direct result of their sale of cryptocurrencies.
This is about to change…
A class-action lawsuit is being levied against Ripple, a quickly-growing cryptocurrency exchange site, for the sale of “unregistered securities.” Though the actual claim of the plaintiff is that the advertising practices of Ripple made him unaware of the possibility of the loss which he eventually sustained, the implications of the case are significant. This case asks courts to adjudicate a key issue: are cryptocurrency companies to be held to the same securities standards as regular exchanges that deal in fiat money?
This guide will provide a comprehensive analysis of the court case, including its conception, Ripple’s response, predictions, and long-term ramifications for the crypto-community.
At the moment, the only evidence of the lawsuit comes from a tweet from a lawyer specializing in cryptocurrency law.
Taylor-Copeland Law files suit against Ripple on behalf of XRP investors. Read the full complaint here: https://t.co/feY5HWNaYx
— James (@TCryptoLaw) May 4, 2018
He remarks that the suit is on “behalf of XRP investors.” The official complaint filed with the State of California lists Ryan Coffey, an investor who lost money on XRP, and all other investors “similarly situated.” This wording makes it likely that other currency investors who lost money on XRP may get involved in the suit.
There are several takeaways from the wording within the lawsuit itself. In particular, this section will highlight the “substantive allegations” levied against the company by the plaintiff and his lawyers.
First, it is alleged that the defendants took action to deliberately market and drive up the price of XRP. This becomes an issue when the plaintiff also outlines that the primary source of income for the heads of the Ripple Corporation is the “sale of XRP.”
In terms of securities, this is a no-no. Companies are not supposed to open their company to the public, market it as much as possible to drive up the price, then profit from selling off their shares.
There are three subsections to this allegation that serve to substantiate the backing and impacts of the claim being made.
The lawyers first argue that the defendants purposely “blur the lines” between the corporation of Ripple and the sale of XRP. This is at least partially true; XRP was the coin offered in the Initial Coin Offering when Ripple was making itself known as a startup company in the cryptocurrency sector.
For the plaintiffs, this provides proof that there was a concentrated attempt to drive up the price of an artificially-generated currency, an effort which was predicated on the formation of Ripple Labs.
The second major accusation is also the one with the most varied and significant implications for the future of cryptocurrency. The accusing party in this class action lawsuit allege that Ripple is a security under United States law.
The first subsection of this accusation holds that investors invested their capitol in a common enterprise—Ripple Labs.
The second argues that there was a “reasonable expectation” of profits from their investment. This is likely where the most defense in the case is going to come from; some experts speculate that it is acknowledged—though perhaps minimized—that the currency does not have the inherent expectation of profit.
If this were true, it would dismantle a key aspect of the case, the classification of XRP as an investment, and the ICO as a security sale.
Finally, the plaintiff states that the success of the currency relied on the efforts of both Ripple Labs and investors/professionals involved with the formation of the company.
Unfortunately, this relatively new story does not have much to offer when it comes to the defendant’s point of view. However, a remark by a lawyer for the company does help clear a few things up.
An email to Coin Telegraph from spokesperson Tom Channick made two distinct arguments regarding the beginnings of the lawsuit.
He first establishes that “we have not been served.” In U.S. law, this means that the relevant parties named on the lawsuit file under ‘defendants’ have not yet been officially notified of the existence of the lawsuit. Though this could possibly imply that the lawsuit is not actually happening and is a hoax, the most likely possibility is that it simply hasn’t been filed and served yet.
But second, the spokesman makes the argument that, while the SEC remains the jurisdiction with the right to decide what constitutes a security, Ripple remains convinced that XRP is not a security, as far as current U.S. definitions are concerned.
It is important to note that the company has not yet released an official tweet or response to the specific allegations regarding the artificial inflation of XRP price and the conflation of company/currency cited by the plaintiff.
More information from Ripple should come out in the coming weeks as their lawyers comb through the accusations and begin to formulate their own counter-arguments. Cryptocurrency correspondent Tiffany Hayden speculated that Ripple might/should file their own lawsuit in response, in order to pay for lost time, expenses, and profits.
Anybody can try and sue. I hope Ripple files a counter suit to recoup their time, expenses, and any loss of value XRP suffers because of this type of crap.
If the the price of XRP drops after this, maybe current XRP holders can launch a class action against this group?
— Tiffany Hayden (@haydentiff) May 4, 2018
Cryptocurrencies and U.S. Security Law
The place of cryptocurrencies in existing U.S. law has always been a hotly-disputed topic of debate. The SEC, or Securities and Exchange Commission, is the primary authority responsible for deciding the fate of cryptocurrency trading. Their current stance holds that ICOs represent the trade of securities.
It should be noted that the concept of a “never-ending ICO” is the primary topic being addressed in the class-action lawsuit. Ripple ceased to officially classify itself as an Initial Coin Offering long ago, but the attacking party argues that the way that Ripple is set up intentionally blurs the lines between the company and the XRP currency they created, feigning a sense of investment.
This is where the issue lays; cryptocurrencies that slightly blur the lines between the currency they created and the company the currency was used to found are relatively commonplace in the cryptocurrency market.
Here is another take:
There's a securities fraud suit from Ryan Cofffey, just filed, against Ripple Labs: XRP is a security, he lost money and it's their fault. I can't tell if it's a lawsuit or a lolsuit. Any informed (i.e. doesn't have $XRP in their Twitter bio) opinion? https://t.co/G9tLXauI8y
— David Gerard (@davidgerard) May 4, 2018
XRP ledger is open source code, XRP is a token majority owned by the Ripple company. Why not fork it and do a new fair distribution without the problems of a security that reduce liquidity? Could have all the features, and none of the negatives.
— Ari Paul (@AriDavidPaul) May 4, 2018
When a company finally gets up-and-running, the currency the created for the ICO does not disappear. In many cases, its value is relatively tied to the successes and failures of the company to which it is linked.
Consequently, the realm of cryptocurrency could be severely affected by the classification of ‘never-ending ICOs’ as securities. If the court made this decision and it became a precedent cited and enforced by the SEC to regulate cryptocurrencies tied to ICOs just as they would regulate stocks sold to investors, hundreds of companies might be in danger.
But the ramifications for cryptocurrency do not stop at the peril faced by numerous companies in the same boat as XRP and Ripple.
This court decision could provide court precedent for an increased spotlight and regulation of all cryptocurrencies.
As the media frenzy over this massive court case and its story, public and government interest in the concept of directly regulating the trade of cryptocurrencies is sure to grow. And with a court decision in-place to provide much-needed legal advice and precedent, who is to say that the U.S. Congress won’t finally step up to regulate a cryptocurrency economy that has been growing for years.
What Would a Regulated Crypto Market Look Like?
Part of the appeal of investing in Initial Coin Offerings is the volatility of the price of coins. Because of the unregulated nature of the market, prices often fluctuate significantly. When this happens, some investors lose money. But at the same time, it is entirely possible to make hundreds of times the initial investment amount if a speculator chooses the right coin to back.
ICO classification as a security by the SEC seems to have had little impact on its volatility and lack of regulation. The reason for this, however, is that many ICOs are traded using foreign accounts and are often run in separate countries.
The situation is different for cryptocurrencies in general, however. Many reputable companies leave the ICO process but maintain at least partial interest in the cryptocurrency they created to fund their process.
For investors in cryptocurrencies, regulation as a security would mean that profits could be less significant, but so could losses. This would also mean more buyer protection in the case of fraudulent activity, but more tax-related regulations on gains, profits, and losses.
Regulation in the way sought by the plaintiffs in this case would also mean that investors would be unable to make predictions on the movements of currencies tied to companies by assessing the short and long-term viability of the organization.
For companies reliant on cryptocurrency trade, the impact is even greater. Companies would have to be incredibly careful to draw a clear, distinct line between the currency they created and the company that they won.
Because one of the main complaints in this lawsuit is that creators of the company profit mostly off of the sale of the cryptocurrency, XRP, that they created, future companies post-regulation would be unable to profit off of this aspect of their business, and would have to be very cognizant of their conformity to regulatory laws regarding securities by the SEC.
Conclusion: Uncertain Future for Cryptocurrencies
Cryptocurrency regulation has long been on the docket for regulation in the United States. However, a number of problems have prevented the U.S. legislature from taking the appropriate actions to place succinct regulations on the commodities.
And while the SEC has classified ICOs as security exchanges in an official statement, cryptocurrencies remain somewhat of a grey-area in U.S. law.
This might change following the adjudication of a major case in the State of California. The class-action lawsuit posits that the company Ripple created a “never-ending ICO,” and that they consequently illegally traded illegitimate securities.
The crux of the plaintiff argument is that the company “blurred the lines” between the cryptocurrency and the company which it initially helped to fund.
While there currently does not exist substantive information on the official defendant response to the specific allegations, the broad stance taken by Ripple Labs is that XRP should not be classified as a security under United States law.
For both cryptocurrency fanatics and hopeful blockchain entrepreneurs, this is a case to watch. Increased interest and regulatory efforts could spell trouble for the future of cryptocurrency trade.