NCFAs innovation and funding ecosystem

SEC v. Ripple: Implications of Ripple’s Fair Notice Defense

Crowdfund Insider | Chris Sloan | Jun 17, 2021

Ripple vs SEC - SEC v. Ripple: Implications of Ripple’s Fair Notice DefenseIn December 2020, the Securities and Exchange Commission (SEC) filed a complaint in a New York federal court against Ripple Labs, Inc. and two of its executives alleging that Ripple had sold $1.3 billion in XRP cryptocurrency tokens in a series of unregistered securities offerings. Because of the potentially monumental impact of this case, almost anyone with an interest in cryptocurrency or blockchain has been following this case closely. A key issue in the case, which recently came to light in a filing by Ripple, is Ripple’s assertion of a defense known as “fair notice.”  The court’s ruling on Ripple’s fair notice defense could have far-reaching implications.

Why XRP and not Bitcoin?

XRP (and other similar cryptocurrencies) differ from Bitcoin, Ether, and other such cryptocurrencies in ways that are critical from a securities law standpoint. The SEC has publicly acknowledged that Bitcoin and Ether are not securities because of the fact that those networks are entirely decentralized and not controlled or regulated by any one party whose efforts are critical to the value of the tokens.

See:  Ripple’s XRP Set To Launch Their Initial Public Offering

XRP’s, on the other hand, are tightly controlled by Ripple and not decentralized to the same degree as Bitcoin and Ether. One of the factors in determining whether something is a security is whether its value is directly derived from the efforts of others; for XRP, the SEC argues, Ripple’s control over the network is a key element of XRP’s value, as opposed to Bitcoin and Ether, which are entirely decentralized.

Ripple’s Fair Notice Defense

Ripple has asserted (among several other defenses, chief among them its assertion that XRP is not a security) that it did not have fair notice as to whether its sales of XRP cryptocurrency were securities offerings. The SEC has moved to strike that defense; essentially, the SEC is asserting that it is so clear that they will win on this issue, the court should throw it out as a matter of law. It is very difficult to win a motion to strike; more than likely, Ripple will have the opportunity to present evidence and argue the fair notice defense throughout most or all of the case.

Ripple’s argument stems from the case of Upton v SEC, which applied the fair notice defense to SEC regulations under the statutes governing securities broker-dealers. In that case, the court determined that the SEC’s interpretation of the statute was entitled to deference, but not in a situation where an individual could be penalized without fair notice that their conduct violated the law. The SEC, in response, has asserted that (1) Ripple had ample notice based on the numerous other cases that the SEC has pursued against companies for issuance of cryptocurrencies, and (2) the Upton case has never been applied to a purely statutory enforcement action (Upton was based on regulations interpreting the statute, not on the statute itself).

See:  Ripple Wins Access to SEC Internal Documents on Bitcoin, Ether, and Other Cryptocurrencies

What’s at Stake?

Although many commentators believe Ripple’s defense that XRP is not a security is the stronger argument, the potential implications of a court ruling on Ripple’s Fair Notice defense are more far-reaching.  If Ripple wins on that issue, that ruling will create a precedent that will make it extremely difficult – perhaps impossible – for the SEC to pursue similar actions against other cryptocurrencies and similar blockchain-based tokens, at least without a change in the law. If Ripple’s win comes from an appellate court, the precedential value would be even stronger.

A decisive victory by the SEC, on the other hand, would raise significant securities law compliance questions about other cryptocurrencies and similar tokens that are not entirely decentralized; likely, many of those would lose significant value, shut down, or face similar enforcement actions from the SEC.

Continue to the full article --> here


NCFA Jan 2018 resize - SEC v. Ripple: Implications of Ripple’s Fair Notice Defense The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

Latest news - SEC v. Ripple: Implications of Ripple’s Fair Notice DefenseFF Logo 400 v3 - SEC v. Ripple: Implications of Ripple’s Fair Notice Defensecommunity social impact - SEC v. Ripple: Implications of Ripple’s Fair Notice Defense

Support NCFA by Following us on Twitter!







For more information about FFCON21: BREAKING BARRIERS, on-demand videos and ways to participate