A Ripple victory could lead to a surge in crypto prices, while a defeat could lead to the withdrawal of some of the industry’s most widely used tokens from US markets.

TLDR 📃

• Ripple Labs was hit with a lawsuit from the SEC in late 2020, accusing them of conducting an unregistered securities offering through the sale of XRP.
• The case hinges on whether the SEC can establish that XRP meets the legal definition of a security.
• Legal experts predict a decision could be released between June and September.
• A favourable outcome for Ripple could have implications for the entire crypto market, potentially leading to a surge in prices for ETH and other altcoins.

Where it all began 🎁

Our story begins in the final days of December 2020 when the American Securities and Exchange Commission sent a surprise Christmas gift to Ripple Labs and two of its executives: a lawsuit alleging that Ripple’s sale of XRP tokens constituted an unregistered securities offering. The suit charged Ripple with wrongdoing beginning in 2013  –  a total of $1.3B in illegal sales.

At the centre of the lawsuit is the question of whether XRP  –  and by implication, many other cryptocurrencies  –  should be considered a security. The SEC argues that it should.

The SEC bases its reasoning on a 1946 precedent in which the US Supreme Court established criteria for identifying securities. These criteria are set forth in the Howey Test, which determines whether an investment contract exists. For an investment to be a security, it must meet these four standards:

1. It must Involve an investment of money.
2. The money is invested in a joint enterprise.
3. Investors have the expectation of making a profit.
4. The profit is obtained through the efforts of others.

Most companies settle with the SEC by paying fines. Ripple decided to fight back, which has led to a lengthy legal battle. This battle is not just about Ripple, but also about the SEC's power over the crypto industry and the classification of cryptocurrencies as securities.  

Where things stand today 🗞️

After enduring two years at trial and staggering legal costs of $200 million, Ripple CEO Brad Garlinghouse maintains optimism about the legal battle. Ripple has made three main points to counter the SEC’s arguments:

• Having XRP tokens doesn't mean you have a legal relationship with Ripple.
• Ripple didn't guarantee that buying XRP would result in profits.
• Ripple didn't receive clear guidance on what they could and could not do, which violates their right to due process.

XRP’s fate rests with Judge Analisa Torres of the Southern District of New York. Both sides have presented arguments and evidence. Now the judge must issue a ruling or submit the matter to a jury for resolution.

Ripple anticipates a 2023 resolution of the case, though an official date has not yet been set.

How a ruling could spark a bull run 📈

As we approach the crucial decision, investors are anticipating the ruling’s impact on the price of XRP. But a favourable outcome could have broad implications for the entire crypto market, not just Ripple.

For example, Ethereum is currently grappling with its own regulatory challenges. If the SEC's position on Ripple is reversed, that could support the legal position that ETH is not a security either.

The governance tokens of DeFi projects and other dApps may not be affected by the XRP lawsuit, as they don't share a lot of similarities with XRP. However, the native tokens of Solana, Avalanche, Cardano, and Cosmos have significant similarities.

If the judge’s ruling clarified that these tokens are not securities, a surge in institutional investment is likely to follow. That could significantly increase the demand  –  and therefore the price  –  for these types of tokens.

Three possible scenarios 🔮

As of today, the resolution of the Ripple lawsuit remains uncertain. We should prepare for a range of possible outcomes.

Worst case: If the SEC wins, XRP will be deemed a security, setting a precedent for rulings on other cryptocurrencies. Ripple may appeal, but that lawsuit could continue until 2026, causing a short-term market drop and increased uncertainty for crypto projects.

Base case: The judge will focus on whether XRP qualified as a security during its 2013 initial offering. A narrow ruling would be unlikely to affect broader US laws and regulations for digital assets if it doesn't address XRP's current status. The outcome will affect only Ripple and the two executives named in the suit. XRP may increase or decrease in price, but market effects will be minimal.

Best case: If Ripple wins, the court will rule clearly XRP is not a security. This would benefit similar cryptocurrencies, reinforcing the industry's view that they are not securities. This could serve as a potential weakening of the SEC's regulatory powers for crypto and lead to a surge in altcoin prices.

Cryptonary’s take 🧠

It looks like Ripple has a pretty strong case. The argument based on the fair notice principle is compelling, especially since it was recently supported in an unrelated Supreme Court case in February.

A Ripple win doesn't necessarily mean that investing in XRP is a no-brainer. A favourable resolution doesn’t erase existing concerns about Ripple’s fundamental value proposition that may make it a less attractive option for some investors. Of course, if the decision goes in Ripple's favour, we could still see a boost in XRP's value.

The important point is that a positive decision could have a ripple effect (pun intended) on the broader crypto market. Other tokens, including ETH, may also benefit, so we could see a boom in a lot of different areas.

Of course, we can't predict the future with absolute certainty. So rather than make a big move before the decision comes down, it's probably best to wait and respond to the situation as it develops.

Action points 🎯

1. To understand our concerns about the fundamental value proposition of XRP, refer to our Ratings Guide, where we provide a detailed analysis of our ranking for XRP. 
2. To stay informed about the case against Ripple and all developments related to XRP and the lawsuit, make sure to read our XRP Digest. We offer bi-weekly updates that cover all the latest news and information.