The long-running legal battle between Ripple and the SEC took a new turn when Chicago-based Bitnomial preemptively sued the regulator, seeking clarification on the jurisdiction over XRP futures contracts.

The XRP price has been flat in 2024, losing 13% YTD. Source: Brave New Coin’s XRP Liquid Index.

XRP Not A Security

Bitnomial argues that since XRP has been declared a non-security by a US court, the SEC has no authority over XRP-based futures, which should fall under the purview of the Commodity Futures Trading Commission (CFTC).

This move prompted a strong reaction from Ripple CEO Brad Garlinghouse, who took to social media platform X to accuse the SEC of being a “renegade agency” operating above the law.

Source: X

Garlinghouse expressed support for Bitnomial, stating that the SEC was hitting a “new low” with its continued attacks on XRP, even after a court effectively declared it a non-security. He pledged that Ripple would closely monitor the Bitnomial case and explore its own options to hold the SEC accountable.

Garlinghouse’s sentiments were echoed by Ripple’s Chief Legal Officer, Stuart Alderoty, who also criticized the SEC on X, framing the situation in stark academic terms:

Source: X

Bitnomial’s lawsuit hinges on the fundamental question of regulatory jurisdiction over cryptocurrency futures. “This is about future contracts and who has jurisdiction over the trading of futures contracts,” stated Bitnomial’s attorney Matthew F. Kluchenek. “There is no question there is a regulator here. But should it just be the CFTC, or should it be jointly the SEC and CFTC?”

The SEC’s continued pursuit of XRP, despite the court ruling, has drawn criticism from various corners of the crypto community. Lawyer Bill Morgan and legal expert John Deaton have both accused the SEC of overreach, questioning the agency’s motives and highlighting a pattern of aggressive regulatory actions.

The Bitnomial lawsuit and the ongoing appeals in the Ripple case are poised to significantly impact the future of cryptocurrency regulation in the US. The outcome will likely determine which agency has the authority to regulate digital asset futures and could potentially clarify the SEC’s overall approach to the crypto industry.

The battle lines are drawn, and the crypto world is watching closely as this crucial legal drama unfolds.

Background to the Ripple Labs SEC Case

The legal battle between Ripple Labs and the U.S. Securities and Exchange Commission (SEC) began on December 22, 2020, when the SEC filed a lawsuit against Ripple Labs, its CEO Brad Garlinghouse, and co-founder Chris Larsen. The SEC accused the pair of raising over $1.3 billion through an unregistered securities offering by selling the XRP cryptocurrency. This case has significant implications for the cryptocurrency industry and regulatory practices and in the years that followed has continued to create investor uncertainty about the legality of crypto investment.

Key Developments:

Initial Accusations: The SEC claimed that Ripple’s sales of XRP constituted an unregistered securities offering, violating Section 5 of the Securities Act of 1933. Ripple contended that XRP should not be classified as a security, arguing that the SEC failed to provide fair notice that such sales were subject to securities laws​ Court Rulings: On July 13, 2023, a U.S. District Judge ruled that XRP is not a security when sold to retail investors on exchanges, but it is considered a security when sold to institutional investors. This partial victory for Ripple was seen as a setback for the SEC’s broader regulatory reach over cryptocurrencies​. Programmatic vs. Institutional Sales: The court distinguished between XRP’s programmatic sales on exchanges and direct institutional sales. While institutional sales were deemed investment contracts subject to securities laws, programmatic sales were not, as retail buyers could not have known who they were transacting with, negating the “expectation of profit from the efforts of others” required by the Howey test​​. Ongoing Legal Proceedings: Despite the mixed ruling, the SEC continued to seek remedies for what it described as the sale of unregistered securities. The case has seen various motions and appeals, with both parties filing for summary judgment. The legal proceedings have also involved debates over the release of sensitive documents and expert testimonies​​. Impact on the Industry: This lawsuit is pivotal as it sets a precedent for how digital assets are regulated and classified. The outcome could influence future regulatory actions and the development of blockchain technologies and cryptocurrencies in the U.S.​ Current Status

In August, a federal court ordered Ripple to pay $125 million in civil penalties and issued an injunction to prevent future violations of securities laws. A victory for Ripple, the ruling was handed down by District Judge Analisa Torres of the Southern District of New York, who determined that 1,278 institutional sales by Ripple breached securities regulations, resulting in a $125.035 million penalty. This amount is significantly less than the $1.9 billion total in disgorgement, prejudgment interest, and civil penalties initially sought by the SEC.

The decision follows Judge Torres’ July 2023 verdict that Ripple’s direct sales of XRP to institutional clients violated federal securities laws, although she found no violations in Ripple’s programmatic sales to retail clients via exchanges.

The decision ended the SEC’s case against Ripple, however, the SEC continues its fight.