Ripple Wins One Skirmish, Rest of the War Still Ahead
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Ripple scored a small victory in its ongoing legal defense when a San Francisco judge ruled against a motion to remand the case of Coffey vs. Ripple Labs to California state courts. However, the company associated with the third-largest cryptocurrency is still knee-deep in a fight which could have deep reverberations through the cryptocurrency space.
The decision was a win for Ripple, which is also fighting rearguard actions against at least three other plaintiffs. By keeping the lawsuit in Federal court, Ripple will be able to apply the judgements on the Coffey case in every other state.
The case was brought by Ryan Coffey, an XRP investor who alleges that Ripple actively promoted XRP as an investment. A judgement in Coffey’s favor may indicate that Ripple’s distribution of XRP constitutes a sale of unregistered securities. Three other investors have also filed similar suits, as well as R3, a banking consortium.
So….is XRP Is a Security?
All of the suits against Ripple Labs share the same complaint: that the company which created and sold the XRP token also worked to increase its value. “Ripple Labs aggressively markets XRP to drive demand, increase XRP’s price, and thus its own profits,” writes Coffey’s counsel, in the complaint.
Ripple and its representatives have provided plenty of ammunition to the plaintiffs’ lawyers. The favorable mentions of XRP on official Ripple media, the fact that Ripple appears to have intentionally escrowed its tokens to boost the price, and may have offered large quantities of XRP to Coinbase and other exchanges to list the token, make it look an awful lot like Ripple was acting in the role of a central promoter, putting the company one grade closer to passing the Howey test.
The company has been in damage control mode since the lawsuits began, and has circulated several press releases to distance itself from the XRP token. “We happen to own a lot of XRP,” said Ripple’s chief marketing strategist earlier this year. “We own a lot of cash, chairs and computers – but the company is called Ripple and we sell software.”
This is a bold defense over what appears to be a technicality. However, the company has amassed considerable artillery of its own, including a former chair of the SEC, to lead its defense.
What does the Suit Mean for Other Cryptos?
XRP isn’t the only company whose fate hinges on the outcome of the Ripple lawsuits. Several other crypto companies have created payment or utility tokens, using the same or similar rationales for their token offerings.
Initial coin offerings raised $5.6 Bn in 2017, and $6.3 Bn in the first four months of this year alone. Not one of these has successfully registered as a securities offering, and only a few have claimed legal exemptions, according to the Securities and Exchange Commission. And, as SEC Chairman Jay Clayton remarked, “every ICO that I’ve seen is a security.”
If Ripple is an unregistered security, then the same likely goes for most of 2017’s crowdsales. With markets at an all-year ebb, it’s safe to say that some investors in those tokens experienced even poorer returns than Mr. Coffey. If so, there may be many more class action suits to come.
The author has a shrinking investment in XRP.