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Say “No” To Regulation By Enforcement

Ripple and the U.S. Securities and Exchange Commission (“SEC”) have been embroiled in a lawsuit as to whether Ripple’s XRP cryptocurrency is a security. The SEC’s decision to treat XRP as a security significantly impacted Ripple’s ability to operate RippleNet in the US. RippleNet is a network of banks, payment providers and others that use XRP to facilitate cross-border payments in real time, offering businesses and consumers a massive discount compared to traditional international wire fees.

Ripple – and much of the industry – has long complained that the SEC never gave them “fair notice” that these sorts of token sales violated securities laws. Rather, they argue, the SEC is engaging in “regulation by enforcement”. In a minor win for the industry, a US District Court dismissed the SEC’s claim that Ripple should be precluded from arguing it didn’t have “fair notice”. The judge held that “[a] fundamental principle in our legal system is that laws which regulate persons or entities must give fair notice of conduct that is forbidden or required” and continued by stating that there are questions of both law and fact as to whether Ripple had fair notice that XRP was a security. In addition to the case against Ripple, this holding has further implications both on the many cases in which the SEC has made similar claims, as well as private lawsuits including, for example, the class action lawsuit against Coinbase alleging that it’s operating an unregulated securities exchange. You can access the District Court’s ruling in the SEC v. Ripple Labs, Inc. here.

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