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Ripple vs SEC Lawsuit Decision: CEO Brad Garlinghouse Lambasts Gary Gensler For Being Out of Touch with Crypto

Last Updated 7 mins ago
Teuta Franjkovic
Last Updated 7 mins ago
By Teuta Franjkovic
Verified by Insha Zia

Key Takeaways

  • Garlinghouse has criticized SEC chair Gary Gensler for being out of touch with the crypto industry.
  • The long-running SEC vs. Ripple lawsuit is approaching its conclusion, with a final verdict expected in July.
  • Ripple recently turned down the SEC’s reduced penalty offer, a decision that could significantly influence the outcome of the case and the market price of XRP.
Amid broader efforts to align the cryptocurrency space with White House policies, Ripple Chief Executive Officer (CEO) Brad Garlinghouse has publicly criticized  the United States Securities and Exchange Commission (SEC) chair Gary Gensler, highlighting the ongoing tensions between the digital asset industry and government regulators.
The Ripple CEO took aim at the SEC for its regulatory overreach and failure to establish clearer guidelines. He argued that the regulator’s approach to regulating the crypto landscape has stifled innovation and proved ineffective.

Garlinghouse Criticizes SEC Chair at Crypto Roundtable, Highlights Growing Political Divide Over Regulation

Garlinghouse’s latest remarks exemplify the escalating tension between the cryptocurrency industry and Washington regulators. His comments followed a roundtable discussion organized by US Representative Ron Khanna, featuring notable figures from the industry and various members of Congress, including Kirsten Gillibrand and Joe Neguse. Other participants included Billionaire Mark Cuban, Coinbase’s Chief Legal Officer Paul Grewal, and Circle’s Chief Strategy Officer Dante Disparte.

During the discussion, Garlinghouse criticized SEC Chairman Gary Gensler and attributed the growing interest in cryptocurrencies among Republicans to the perceived hostility from the Democratic Party. His critique underscored the broader debate over regulatory overreach and the need for clear guidelines in the crypto space.

While appreciating the roundtable discussion as a significant step forward for the cryptocurrency industry, Garlinghouse expressed regret over the persistent support of most Democrats for SEC Chairman Gary Gensler’s approach to crypto regulation. According to Garlinghouse, this stance has continuously hindered American innovation. In stark contrast, the Republican Party has shown strong support for the digital asset sector, emphasizing the growing political divide on cryptocurrency issues.

The Ripple CEO referred to Gary Gensler as a “Luddite,” suggesting the SEC chair resisted new technology. Garlinghouse believes Gensler’s skepticism is akin to trying to halt a tidal wave, ultimately driving innovation and opportunities away from the US. This is not Garlinghouse’s first criticism of Gensler’s regulatory approach. However, he concluded  with the hope to “see action, and not just words.”

Coinbase CLO Highlights Need for Legislation over Litigation

Coinbase’s Chief Legal Officer, Paul Grewal, emphasized  the importance of legislative action over continued litigation during a recent roundtable discussion.

Grewal highlighted that the meeting aimed to advocate for clear, supportive laws for the cryptocurrency industry, reflecting the personal nature of policies to the 52 million Americans who have owned cryptocurrency.

He pointed out  that many people, especially those from historically marginalized communities who are disproportionately unbanked or underbanked, view the administration’s opposition to their access to the financial system as a personal attack. Grewal expressed optimism, noting that the productive roundtable has renewed hope for positive change, underlining the bipartisan momentum around cryptocurrency.

Former White House Communications Director Anthony Scaramucci commented that he was looking forward to “positive bipartisan legislation  and regulation for digital assets and property.

SEC, Ripple, and Coinbase did not immediately respond to a request for comment.

Judge Jackson Dismisses Part of SEC’s Case Against Binance, Cites Lack of Evidence on BNB Sales

July 13 is a significant date for Ripple, marking the anniversary of Judge Torres’ crucial ruling that declared XRP not a security. This ruling dramatically influenced XRP’s market value, causing its price to double within hours and underscoring the influence of legal decisions on market dynamics. Fred Rispoli’s pinpointing of this date for the potential final verdict reflects a hopeful sentiment among Ripple supporters for a similarly favorable outcome.

However, Rispoli added that a pre-judgment settlement between the SEC and Ripple was unlikely, although some issues may still be open for negotiation.

Building on Judge Annalisa Torres’ precedent, Judge Amy Berman Jackson of the US District Court for the District of Columbia has partially dismissed the SEC’s charges against Binance regarding BNB sales on the secondary market. Judge Jackson ruled that the SEC failed to provide sufficient facts showing that secondary market sales of BNB tokens on crypto exchanges constituted securities transactions. The court also rejected the SEC’s claim that Binance’s fiat-backed stablecoin, BUSD, qualifies as an investment contract.

Judge Jackson emphasized  that addressing the digital asset industry on a “case by case, coin by coin, court after court” basis results in inconsistent outcomes and ongoing ambiguity. This ruling references Judge Torres’ decision on the same date last year, which determined that XRP is a commodity when sold to the general public.

In her Summary Judgment , Judge Torres stated that Ripple’s Institutional Sales of XRP constituted the unregistered offer and sale of investment contracts, violating Section 5 of the Securities Act. This decision significantly impacted the Ripple community, triggering a surge in the XRP price by over 100%.

Following Judge Jackson’s decision, Ripple submitted a notice of supplementary authority, reinforcing the legal perspective on digital asset classification.

In recent days, Coinbase and Ripple have emphasized the lack of clarity surrounding cryptocurrency regulation in filings submitted for their respective legal cases. Both companies argue that the ambiguous regulatory environment hinders their operations and creates legal challenges.

Coinbase and Ripple Highlight Regulatory Uncertainty in Recent Court Filings

In recent days, Coinbase and Ripple have emphasized the lack of clarity surrounding cryptocurrency regulation in filings submitted for their respective legal cases. Both companies argue that the ambiguous regulatory environment hinders their operations and creates legal challenges.

In a court filing  on July 2, Coinbase stated that Binance also supports the need for the SEC to engage in rulemaking regarding digital assets. Coinbase argued that rulemaking is essential because the SEC has adopted an unprecedented and extensive interpretation of securities laws, which it has never clearly explained but is now trying to enforce retroactively on the digital asset industry through aggressive enforcement actions.

Ripple also leveraged Binance’s recent legal victory to challenge the SEC’s inconsistent regulatory approach, arguing for the necessity of formal rulemaking. The notice underscored that intangible digital assets did not neatly fit into the Howey test framework, a seven-page opinion used to classify securities.

Ripple criticized the SEC’s reliance on court cases to regulate the industry, warning that this could lead to inconsistent results and unclear guidance for market participants.

SEC Emphasizes Fair Notice in Response to Ripple, Omits Discussion on Secondary Market Transactions

On July 3, the SEC countered  Ripple’s notice  of supplemental authority, which cited a recent Binance ruling to criticize the SEC’s “regulation-by-enforcement” approach and highlight a lack of regulatory clarity.

The SEC dismissed Ripple’s attempt to use the Binance case, with SEC’s Jorge Tenreiro calling it “completely irrelevant” to the current motion. The agency argued that Ripple omitted a crucial part of the Binance ruling, which rejected the fair notice defense, emphasizing that the SEC was enforcing a longstanding federal security statute. The ruling also mentioned that the crypto industry had been notified by the SEC’s 2017 DAO report, predating most of Ripple’s XRP sales.

Former SEC official John Reed Stark described the Binance ruling as a significant loss for the exchange.

 

The SEC focused on the fair notice aspect of the Binance ruling in its response to Ripple. In the filing, the SEC pointed out that Ripple omitted the relevant part of the Binance ruling, which rejected the fair notice defense, similar to this court’s previous decision.

Fair notice is a legal principle ensuring that individuals are adequately informed of any claims or legal actions against them, providing them with the necessary information and opportunity to respond or defend themselves.

Regarding fair notice, the SEC emphasized  its position on having provided the necessary notice, asserting:

“Ripple’s latest letter entirely omits the one part of Binance that could conceivably have any relevance to the remedies motion. This is the portion of the ruling rejecting – like this court did – the argument that the fair notice doctrine provides a defense to liability.”

It added :

“The SEC put the industry on notice since the Jul 2017 DAO Report, which predated the overwhelming majority of Ripple’s sales at issue in this case.”

The SEC concluded that the Binance court noted the defendants were aware that the SEC could take action against them, similar to how Ripple had specific notice of the risks involved in its actions based on legal advice yet chose to proceed.

While the SEC emphasized the fair notice aspect, it avoided addressing the secondary market transactions of Binance Coin and the Programmatic Sales of XRP ruling.

XRP at a Critical Juncture

XRP now finds itself at a critical juncture after Ripple declined the SEC’s offer to reduce its penalty to $102.6 million. This decision could significantly impact both Ripple and the XRP token, which has already incurred over $200 million in legal costs. Currently priced  at $0.4572, XRP has experienced a fall of 4.63% in the last 24 hours and 1.5% over the past week. With a 14% increase in trading volume reaching $862 million, the potential for further gains remains if market sentiment continues to be positive.

In May, the SEC emphasized  the importance of XRP’s financial status in their legal arguments, asserting that it is crucial for the court’s analysis to determine appropriate remedies. Ripple has contested this claim, according to a recent post by defense lawyer James K. Filan.

US Court Dismisses SEC’s Major Claims Against Binance, Echoes Ripple Victory

In a pivotal decision for Binance, the US District Court for the District of Columbia dismissed significant claims  brought by the SEC against the exchange. Led by Chairperson Gary Gensler, the SEC filed a lawsuit in June 2023 accusing Binance of selling unregistered securities and operating unlawfully within the US.

The court’s ruling  echoed Judge Torres’ landmark decision in the SEC vs. Ripple case. In July 2023, Judge Torres determined that Ripple’s XRP token sales on secondary trading platforms did not constitute offers of investment contracts. This rationale played a crucial role in rejecting the SEC’s argument that crypto tokens inherently qualify as investment contracts. Both cases underscore the importance of transactional context in assessing token classifications, challenging the SEC’s broad regulatory stance.

This ruling marks a significant victory for the cryptocurrency industry, establishing a precedent that could curb perceived regulatory overreach by the SEC.

SEC and Ripple Clash Over Confidential Financial Details in Court

In its response on May 20, the SEC urged the court to dismiss Ripple’s request. The SEC argued that details such as Ripple’s current assets, recent sales figures, revenues, expenses, and the discounts offered to institutional investors are essential for assessing remedies. The SEC also accused Ripple of trying to hide the extent of these discounts, which it described as discriminatory.

In its latest response supporting its motion to seal, Ripple disagrees and states that its current financial status is irrelevant to the court’s analysis, emphasizing that it is not claiming an inability to pay any assessed penalty. Ripple argued that the SEC should not be permitted to force disclosure of Ripple’s sensitive financial information based on arguments that lack foundation, particularly when the court can dismiss those arguments without needing to refer to any confidential details.

Arguing for its rights to privacy and confidentiality, Ripple aimed to shield itself from the “significant harm” that could result if certain documents were made public.

According to Ripple’s court filing , the company attempted to seal specific documents related to the SEC’s motion for judgment and remedies. They requested “narrowly tailored redactions” for the briefing on the Remedies Motion and some exhibits.

Additionally, Ripple sought to have “highly sensitive and confidential” information completely sealed, emphasizing the need to protect this data from public disclosure.

SEC Counters Ripple’s Motion to Dismiss Expert Materials in Ongoing Legal Battle

At the beginning of May this year, the regulator submitted its opposition to Ripple’s request to dismiss new expert materials, focusing on testimony referred to as the “Fox Declaration.” Ripple had previously contested this declaration, arguing that it constituted an unsolicited expert opinion.

The SEC then responded to Ripple’s objections by describing the testimony as “standard summary evidence in support of calculations for disgorgement.” They argued that such evidence is commonly used and appropriate for determining financial remedies in legal proceedings.

It then stated :

“It’s not an expert report, does not rely on specialized experience, and does not render any opinions at all, let alone an “expert” one. Nor does it present the testimony of a percipient witness. Rather, it applies basic arithmetic to Ripple’s financial records to streamline the presentation of the evidence to Judge Torres… The court should deny Ripple’s motion.”

The agency also was expanding its argument by noting that the Fox Declaration included data sourced from documents produced by Ripple, such as tax returns and financial statements. The SEC highlighted the importance of this information in determining the appropriate financial penalties in the case, underscoring the declaration’s critical role in shaping the outcome of the trial.

The SEC had also emphasized that Federal Judge Torres had previously dismissed similar objections raised by Ripple, suggesting the possibility of the court siding with the company again. This reference is intended to bolster the SEC’s argument that the issues contested by Ripple have already been addressed and resolved by the court in past rulings. According to the Commission, these historical decisions reinforce the validity of their current position in the ongoing legal battle.

SEC Doubling Down: Files Remedies Brief, Seeks Injunction

As discussions surrounding the Ripple vs. SEC lawsuit heat up, the SEC has submitted its redacted remedies reply brief  along with supporting documents to the court.

This development, highlighted by influential crypto lawyer James K Filan , has stirred conversations within the crypto community.

Amid the ongoing legal battle between Ripple and the SEC, a significant development has emerged, with the SEC filing its redacted remedies reply brief  along with supporting exhibits. The SEC’s argument primarily centers on Ripple’s alleged recurrent violations and the necessity of injunctive relief to prevent future infractions.

Central to the SEC’s stance is Ripple’s history of unregistered sales of its XRP token, dating back to 2013, and its purported plans to introduce a new unregistered crypto asset. The SEC contends that Ripple’s past actions pose an ongoing risk, justifying regulatory intervention to protect investors and uphold market integrity.

In response to Ripple’s defenses, the SEC points to the dismissal of similar arguments in prior cases, such as Coinbase, asserting that Ripple’s purported changes to prevent future violations are insufficient.

Furthermore, the SEC challenges Ripple’s objections to disgorgement of ill-gotten gains, highlighting the harm inflicted on institutional investors due to undisclosed financial terms.

Ripple Lawyer Disputes SEC’s Claims of Financial Harm, Injunction Need

In response to the SEC’s latest filing, pro-XRP lawyer Bill Morgan closely examined  key issues raised, particularly concerning financial harm and the potential for a permanent injunction. While the SEC argues for a broad interpretation of financial harm, challenging Ripple’s stance, Morgan expresses skepticism about the likelihood of disgorgement but anticipates an appeal.

Regarding the permanent injunction, the SEC asserts that Ripple’s primary business revolves around XRP sales to institutions, thus justifying the need for an injunction. Furthermore, the SEC argues that Ripple’s defense on On-Demand Liquidity (ODL) sales lacks merit, potentially leading to a broad permanent injunction.

However, Morgan raises concerns  about the court’s previous classification of ODL sales as investment contracts and foresees appellate challenges for Ripple. Given this, the current focus is on demonstrating that ODL sales involve immediate consumptive use, a crucial aspect of Ripple’s defense strategy.

Ripple vs. SEC Nears Climax: Legal Battle Holds Weight for Crypto Industry

On the flip side, legal expert Jeremy Hogan offers a critical perspective , suggesting that the SEC’s arguments lack substance. Hogan points out the SEC’s failure to adequately address crucial issues such as Ripple’s On-Demand Liquidity (ODL) sales and the absence of new information regarding damages. Additionally, he highlights what appears to be the SEC’s lack of effort, implying a weak stance in the ongoing legal battle.

With both parties having submitted their briefs, anticipation builds as the case awaits the judge’s decision.

Alderoty: Gensler Prejudged Ripple’s Case

The ongoing legal battle between Ripple and the SEC took a new turn in October 2023 with the remarks made by SEC Chair Gary Gensler.

In a speech  at the Securities Enforcement Forum 2023, Gensler referenced the SEC’s role as a protector of investors and a prosecutor of dishonest practices.

Ripple’s Chief Legal Officer, Stuart Alderoty, criticized  the recent Gensler’s remarks who referenced  the wisdom of the inaugural SEC Chair, Joseph P Kennedy, highlighting the agency’s role as a collaborator with upright enterprises and a prosecutor of dishonest practices.

However, amid these statements, Gensler also included  several quotes from leaders, with one of the most notable being: “We shall not prejudge, but we shall investigate.” This speech took place at the Securities Enforcement Forum 2023.

Upon the dissemination of Gensler’s speech , Alderoty swiftly responded to the comments. In his reply to the speech, Alderoty explicitly stated that Ripple’s case had been prejudged. Contrary to Gensler’s assertions, Ripple’s Chief Legal Officer seemed to underscore the true nature of the ongoing legal dispute.

He added: “Firstly, Ripple wasn’t charged for ‘Dishonesty,’ and secondly, the case was all ‘prejudged’ with a compromised Hinman’s Bill.”

William Hinman, a key figure in shaping the regulatory status of cryptocurrencies, is accused of having a potential conflict of interest due to later affiliations with a law firm involved in the Ripple case.

Expanding on his statement, Alderoty pointed out that the SEC had sued Ripple and various other firms without conducting prior investigations.

Furthermore, Stuart Alderoty drew attention to the SEC’s recent legal setbacks in a tweet. He highlighted the agency’s courtroom losses and the criticism it faces from judges for what is described as “shady behavior”. The government’s internal auditor joined in the criticism, rebuking the SEC and raising questions about its internal practices.

Ripple And SEC Outline Discovery Roadmap

The ongoing XRP lawsuit, a central focus within the cryptocurrency community, reached a pivotal juncture under the guidance of Judge Analisa Torres in the Southern District of New York. A prominent attorney closely engaged in overseeing these proceedings has provided a crucial update.

Ripple Labs and the SEC have now each submitted their proposed schedules, delineating the roadmap for the settlement phase.

During this phase, encompassing remedies discovery and briefing, a significant legal battle is underway, setting the stage for negotiations that will significantly influence the course of the case. What sets this phase apart is the definition of ‘permissible discovery terms,’ which essentially outlines the boundaries for exploration by both parties.

The recent SEC letter , dated November 9, holds significant importance as it delineates the permissible discovery scope. A mutual agreement acknowledges that permissible discovery should primarily focus on events predating the SEC’s initial complaint against Ripple – a critical aspect for settlement talks.

But what makes this settlement a point of contention?

Pros of Settlement

A potential settlement in the XRP lawsuit carries both advantages and disadvantages. On the positive side, it could bring much-needed clarity to XRP’s status, benefiting the cryptocurrency industry and its investors.

It would also save substantial legal costs by avoiding a protracted trial, enabling more efficient resource allocation. Furthermore, a settlement would remove the cloud of regulatory uncertainty hanging over Ripple, fostering confidence in its operations.

Cons of Settlement

However, settling the case may also have drawbacks. It could set a precedent for future crypto-related legal battles, potentially influencing regulatory approaches.

Additionally, it might miss the opportunity to establish clear industry regulations, leaving lingering ambiguity. Finally, the complex process of agreeing on terms and timing for a settlement could potentially prolong the case’s resolution.

Latest Update

Both Ripple Labs and the SEC have agreed to focus on events preceding the SEC’s complaint. The SEC has requested 90 days for discovery related to remedies, a proposal accepted by Ripple, demonstrating their willingness to cooperate.

However, Ripple retains the right to challenge any discoveries made post-complaint. The SEC has also been granted permission to depose a key witness, Anthony M. Bracco , within the next 90 days.

The suggested administrative schedule included explicit timetables for addressing the outstanding fee associated with selling XRP to institutional investors. There was no indication that a settlement was nearing.

The cryptocurrency market cap increased by 3.8% to $1,368 billion during a positive session for the overall market on Thursday, November 9. This increase may have been partly influenced by the lack of progress toward a resolution in the XRP case.

Brad Garlinghouse, the CEO of Ripple, was pretty outspoken during DC Fintech Week 2023. 

“I think that definitely could happen. […] We’ve said this publicly. We’re in it until the end.”

The Ripple CEO also said  there was a possibility of the Supreme Court and the chances of Supreme Court victory.

“That is a good thing. The current Supreme Court, we’d love to see the Vegas odds on how that would go. They have not been friendly to regulators.”

Discussing the US regulatory landscape, Garlinghouse commented :

“It has become a political liability. The way the SEC has approached this in the United States, we are looked at here in the US, relative to other countries, as stuck.”

What Has Led to This Point?

The battle between Ripple and the SEC has been drawn out over a few years now — however, the ebbs and flows of this case are worth noting as one side and then the other appears to gain the upper hand in certain instances.

The SEC has previously filed an interlocutory appeal in relation to the XRP ruling, which has added to the unfavorable attitude around the price of XRP.

As a result, Ripple had to respond by September 1 and the SEC by September 8 in order to address any additional responses that Ripple may provide.

Notably, Ripple wants to “dramatically reduce” the penalties, while the SEC wants the full $770 million in institutional XRP transactions. Therefore, the outcome of the settlement talks and the ultimate court ruling will determine the exact amount that the blockchain company would have to pay.

Prior to this, attorney John E. Deaton stated  that he believed Ripple would win the case 99.9% of the time if the company settled for $20 million or less.

Meanwhile, attorney Jeremy Hogan clarified that the sum that was “fair” required to include net earnings from the sales rather than gross.

Ripple Wins a Partial Victory

After nearly two years of litigation, Ripple landed a significant win against the SEC. On July 13, US District Judge Analisa Torres declared that Ripple did not violate federal securities law by selling its XRP token on public exchanges.

The announcement  caused a domino effect of positive outcomes. Ripple’s native token saw a huge surge in price, another big exchange had its hope revitalized regarding its own SEC case, and the market may have changed its perspective on altcoins.

Essentially, the judge ruled that Ripple did not violate the securities law by selling $1.3 billion worth of XRP. Judge Torres decided that Ripple’s XRP sales on public cryptocurrency exchanges were not offers of securities under the law, because they do not offer any guarantees of profit. 

On top of that, Ripple sold XRP in “blind bid/ask transactions,” and therefore, buyers “could not have known if their payments of the money went to Ripple or any other seller of XRP.”

Ripple Vs. SEC – The History

In 2020, the SEC alleged  Ripple raised over $1 billion in 2013 through the sale of XRP in an unregistered security offering to investors. Ripple then responded XRP is not a security and that the SEC lacked fair notice.

The SEC then responded by requesting the judge to have a hearing immediately. In June 2021,  the court extended the SEC’s deadline for disclosing its internal crypto trading policies.

Ripple Labs defended itself by saying, “XRP does not qualify as an investment contract.” It claimed the company itself never entered any such contract with its investors in the first place. Furthermore, Ripple claims, XRP remains outside the SEC’s range since it is a virtual asset.

In a recent interview, the president of Ripple Labs, Monica Long, commented  that “both the facts and the law” are on Ripple’s side.

Ripple Vs. The SEC Timeline

Date Event
December 21, 2020 SEC initiates a lawsuit against Ripple Labs.
December 28, 2020 Coinbase delists XRP.
March 3, 2021 Larsen and Garlinghouse challenge the SEC’s fair notice.
March 8, 2021 SEC requests an immediate hearing in response to the challenges.
March 22, 2021 XRP token determined to have currency value and utility by Judge Sarah Netburn.
April 13, 2021 Hester Peirce, SEC Commissioner, publishes Token Safe Harbor Proposal 2.0.
June 14, 2021 SEC’s internal crypto trading policies deadline extended.
August 31, 2021 SEC’s internal crypto trading policies disclosure deadline.
October 15, 2021 Expert discovery deadline to gather opinions from cryptography and securities experts.
January 24, 2022 Extension granted for the disclosure of sensitive government documents.
September 17, 2022 SEC and Ripple Labs file initial motions for summary judgment.
September 21, 2022 Chamber of Digital Commerce granted permission to file an amicus curiae brief.
December 2, 2022 Public release of replies to summary judgment motions.
December 22, 2022 SEC attempts to prevent public release of Hinman documents.
June 12, 2023 Hinman documents unsealed and made public.
July 13, 2023 Ripple Labs wins the case, with Torres ruling that Ripple did not violate the law when XRP was sold on public exchanges.