Despite the obvious headwind of having the Securities and Exchange Commission raining down dreadful allegations, Ripple Labs, the company responsible for the Ripple (CCC:XRP-USD) digital asset, has held up quite well under the pressure. Further, recent developments suggest that it might be able to squeak a legal victory from the almighty SEC.
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At issue is whether or not Ripple is a legitimate cryptocurrency, or a subterfuge for an illegal initial public offering. Both sides bring up compelling arguments to support their case, with Ripple Labs asserting that its XRP-USD coin is a medium of exchange, like cash or cryptocurrency. Certainly, the XRP network, which facilitates incredibly quick transactions for nominal fees, is inherently useful and can spark innovation, such as microtransactions.
On the other hand, the SEC has zeroed in on a Supreme Court case called SEC v. Howey. The precedent from the case sets forth guidelines regarding the definition of a security. Specifically, the regulatory agency believes that XRP represents pooled money, with investors expecting to share in the profits of a particular endeavor.
This part is tricky for Ripple Labs because, prior to the SEC lawsuit causing widescale delisting from most popular exchanges, retail investors could easily open a crypto trading account and buy and sell XRP, just like a stock. Again, while both sides are adamant about the superiority of their opinions, I can see where each has their strengths.
However, Ripple did enjoy a not-insignificant legal victory in preliminary rulings by successfully shielding its executives’ personal bank records from discovery. That move will make it difficult for the SEC to establish improprieties regarding the distribution of XRP coins.
Ultimately, though, even if Ripple managed to emerge victorious in this lawsuit, it might end up being a moot point.
Broader Regulation Concerns Overshadow Ripple Lawsuit
When I think about the legal troubles putting a dark cloud over the XRP network, I can’t help but think about the World Cup tournament; specifically, the third-place match. Yes, it’s meaningful in the sense that we’re talking about the World Cup and that it only happens every four years.
Still, it doesn’t carry any of the drama associated with the final matchup. The third-place match is merely a glorified exhibition game (or friendly in association football parlance).
And that’s how I feel about Ripple. If you’re a crypto advocate, you want the company to stick it to the SEC. Plus, it would be karma. Frankly, the SEC hasn’t done itself any favors, waiting around for years just to throw a lawsuit at Ripple. But even a victory here probably wouldn’t dent the bigger picture of crypto regulations.
Earlier in February of this year, Treasury Secretary Janet Yellen warned the public about Bitcoin (CCC:BTC-USD), stating in part “To the extent it is used I fear it’s often for illicit finance. It’s an extremely inefficient way of conducting transactions, and the amount of energy that’s consumed in processing those transactions is staggering.”
Well, I can say that Yellen was prescient. As you know, Colonial Pipeline suffered a ransomware attack, sending shockwaves throughout the southeastern part of the U.S. Primarily, this brings up (yet again) the vulnerabilities this country faces in terms of cybercrimes and breaches.
But as the New York Times reports, the ransomware extortionists demanded that Colonial Pipeline pay up to the tune of $5 million — in Bitcoin.
I should note that this wasn’t just some meaningless attack on a private entity. This attack went after a major portion of the U.S. economy. It’s clear that while cryptocurrencies have their benefits, they can also be used as a means to extract wealth illegally.
May Not Mean Much in the End
Another point that crypto investors should realize is the unprecedented distribution of pandemic-related relief funds. On paper, the proposal makes sense — give regular folks direct injections of cash to boost confidence. As people spend the money, this will get circulated throughout the economy, lifting all boats.
And most people are using the relief payments to do just that, provide relief. Undoubtedly, though, some folks are using the funds to buy cryptocurrencies. But such purchases may not circulate in the economy. As decentralized mediums of exchange, purchasing cryptos could benefit anyone.
This adds to the pressure that the federal government must do something about crypto regulation. Look, I’m not supporting such measures. But the cat’s out of the bag. So while Ripple might get the victory it’s seeking, that might not matter in the end.
On the date of publication, Josh Enomoto held a LONG position in XRP and BTC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.