Recently, Ripple Labs Inc was ordered by a federal district judge to pay a civil penalty of $125 million for violating federal securities laws. This order was the latest development in a case that started in 2020, when the U.S. Securities and Exchange Commission (“SEC”) alleged that Ripple was selling its cryptocurrency, XRP, as an unregistered security. Specifically, the SEC alleged that Ripple was conducting an unending initial coin offering and flouting the Howey Test. The SEC also argued that XRP is a security that should have been registered with the SEC and that Ripple’s insiders (who also held a significant percentage of XRP) created an information vacuum with total unilateral control about what information should be disclosed about Ripple and XRP.
The SEC has long been pressing its case for bringing the industry under its oversight, with SEC Chairman Gary Gensler stating “very many [cryptocurrencies] are” securities and cryptocurrency exchanges should register with the SEC as securities trading platforms. Indeed, the Ripple case has been closely watched by many because of its broad implications for the SEC’s regulatory power over cryptocurrencies as a whole.
The $125 million fine imposed on Ripple was in connection with its institutional sales of XRP violating federal securities laws. Judge Analisa Torres, of the Southern District of New York applied the Howey test and found that the Company’s institutional sales constituted offers or sales of investment contracts but reiterated that Ripple’s programmatic sales of XRP to retail clients through exchanges did not violate federal securities laws. Initially, the SEC had sought approximately $1 billion in disgorgement and prejudgment interest, and a further $900 million in civil penalties. In addition to the $125 million fine, Judge Torres also enjoined Ripple from future violations of federal securities laws, finding that “Ripple’s willingness to push the boundaries of the Order evinces a likelihood that it will eventually (if it has not already) cross the line.” Judge Torres continued, “[o]n balance, the Court finds that there is a reasonable probability of future violations, meriting the issuance of an injunction.”
Ripple has expressed satisfaction with the decision, treating the drastically reduced penalty as a substantial win for the Company, which will likely turn back to furthering its growth in the cryptocurrency market.
Meanwhile, there is still time for the SEC to appeal the decision. The SEC’s decision on whether to appeal could hinge on a multitude of factors, including potential implications for future cryptocurrency regulation and enforcement, along with the current political climate. The SEC’s Chairman, Gary Gensler, is facing intense political pressure with the upcoming presidential elections. If Gensler were removed from his position, there is a chance that the SEC may choose to focus on other priorities, however, if Gensler remains in his position, the SEC could choose to focus on an appeal to the U.S. Supreme Court.
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