Ripple, the company that stands behind XRP, has definitely positioned itself strongly during the last few months as one of the most important companies for the crypto sector as well as the whole blockchain technologies scene. It may be too late for XRP to be classed as a security.
At least that’s the opinion of two independent legal experts who have explained to Crypto Briefing that any regulatory clarity gained would be far outweighed by costs or even the negative effects it would have on the sector.
Max Rich, deputy counsel at the crowdfunding platform Republic, thought it was unlikely the SEC would compel Ripple Labs to reimburse investors. He believed authorities would crack down on ICO projects that were based on the proposition of selling unregistered securities.
XRP token sale which took place in mid-2013, however, seems to be excluded. After all, it happened such a long time beforehand.
Republic is an investment platform where “everyone can invest as little as $10” in innovative startups curated by their team. It is a community empowering founders and giving everyone the chance to be an angel investor. Republic was founded and built by AngelList alumni who believe angel investors are the catalysts to change in the world.
As counsel for Republic, Max guides companies through the crowdfunding process, coordinating the regulatory and compliance needs of the platform with the securities laws filings the companies must make to raise funds.
Rich said that the SEC will use the DAO debacle, in the summer of 2016, as the cut-off point. Projects that hosted a public sale before may be treated differently to those that happened after that date.
“I do think the SEC uses the DAO as an inflection point.”
Rich thinks earlier public sales, like Ripple, may still be dealt with by the SEC. That said, they may not be the regulator’s immediate focus.
“It’s likely they are using limited resources to address offerings where there are i) principals that can be identified, ii) funds can be traced and clawed back and iii) benefits that can be gotten for the public – an enforcement net benefit,” he wrote.
The thing is, crypto markets is still plunging. Ethereum (ETH) has reached an all-year low of $155, plunging 37% last week. But those losses were positively bullish compared to the galaxy of ERC-20 tokens, many of which suffered double-digit losses within just a day.
The freefall appears to be related to last Friday’s announcement of regulatory settlements from two non-compliant ICOs. Airfox (AIR) and Paragon (PRG) both agreed to refund their investors, register their tokens as securities, and pay penalties to the Securities and Exchange Commission.
This was the first securities enforcement against US-based token sales. Although the SEC has previously pursued actions against fraudulent sales, and stopped at least one ICO in its tracks, last week brought the first penalty for ICOs that failed to register their tokens or claim exemptions.
While the crackdown isn’t good news for anyone in the ICO space, there is some suggestion that the sell-off may be something of an overreaction. With only a quarter million in penalties each, Paragon and Airfox may have gotten off easy, suggesting lenience for token sellers who are willing to bend the knee.
Michael Minihan, an attorney and parter at Bx3 Capital said that he thinks that the actions were appropriate:
“They were found to have sold unregistered securities, and were provided a path to compliance, albeit with a penalty for the failure to register. That feels like a fair outcome, even if there is no indication of new guidance around digital assets, only additional evaluation of the marketplace by the SEC.”
He also pointed out that XRP is highly integrated with the cryptocurrency sector and highlighted that its size and influence within crypto would make it difficult to touch. Any changes in its regulatory status will have significant knock-on effects.
“The thing with XRP is it’s almost like a too big to fail, too far along. Basically, if you torpedo Ether, you’re going to tank the whole thing. You have the ability to tank most of the market by doing that. I think that’s not what they want to do. I think all they’re trying to do is protect investors, and by calling Ether a security, doesn’t protect investors.”
XRP has itself come under attack for being centralized, as the currency has been entirely pre-mined and is controlled by Ripple. Many other coins, such as Bitcoin, do not have this problem but there are always other ways to be considered centralized.
The thing is, Ripple now has contradictory statements related to the company’s 2013 and 2018 posts. In 2013, Ripple Labs stated that they created the total 100 B XRP supply while today the organization says the opposite. It seems that Ripple could be changing their stance on key statements due to the fear that the SEC would consider XRPs as securities.
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