The ongoing battle between fintech firm Ripple and the U.S. Securities and Exchange Commission (SEC) could be coming to a conclusion. However, the regulator’s chances of a victory are growing slimmer according to legal experts.
Crypto legal experts have hinted that the SEC could be looking at a “bruising defeat” in its case against Ripple. A verdict against the regulator could severely limit its capacity to oversee the regulation of the crypto asset sector. This would be a big win for the industry and innovation in the U.S.
On Oct 30, senior analyst Roslyn Layton told Forbes: “If that’s how it ends, it will have been a self-inflicted disaster from the start.”
The Ripple fightback
The SEC took action against Ripple and two senior executives in December 2020. It accused the company of conducting an unregistered securities sale of its XRP token. Earlier this month Ripple CEO Brad Garlinghouse called the reluctance by the SEC to hand over key documents “shameful.”
Ripple and token holders have been fighting back for almost two years, and their case is strengthening. Furthermore, over 75,000 XRP investors have joined the cause filing amicus briefs backing Ripple.
“The SEC has had no allies, not even its own expert witnesses who ended up giving ammunition to the defense,” Layton wrote.
Attorney Jeremy Hogan said that the SEC can only win if Judge Torres, who is presiding over the case, “forgets her first year of law school.”
Other prominent legal experts also agree that Ripple is on the path to victory. These include Curt Levey of the Federalist Society and Professor J.W. Verret of George Mason University’s Scalia School of Law.
Overturning the Howey Test
Verret said that the SEC may appeal to the Supreme Court which it is likely to lose. This could completely overturn or eliminate the use of the Howey Test to classify cryptocurrencies.
SEC Chair Gary Gensler has been using this test to assert that crypto assets are securities. The Howey Test, defined in 1946, determines what qualifies as an “investment contract” and therefore a security. The contract is defined as an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”
Ripple has already agreed to settle and pay a fine if the SEC declares that XRP is not a security. However, it seems like Gensler and co. are determined to keep fighting even if it is a losing battle.
A win for Ripple would not only see their token prices surge, but could also set a precedent that prevents the SEC from wrongly labeling cryptocurrencies as securities and cracking down by enforcement.