The end may be in sight for the long-running court battle between the Securities and Exchange Commission (SEC) and Ripple Labs, though perhaps not in the way either side had hoped. Last week, Ripple -- the company behind XRP (XRP 0.15%) -- dropped its appeal after Judge Analisa Torres denied a joint request to backpedal on her original ruling. It expects the SEC to follow suit.
Let's dive in to find out what that might mean for investors, and what indicators to watch now that the legal proceedings are almost over.
Ripple's legal woes
The SEC sued Ripple Labs in 2020, claiming it had sold XRP as an unregistered security. Many saw the case as crucial for the whole industry, as it centered on how cryptocurrencies might be defined.
Almost two years ago, Torres delivered a split ruling. She said that the sales of Ripple's XRP to institutions had been securities transactions (and therefore illegal), while retail sales of XRP were not. She issued an injunction against institutional sales of XRP and fined Ripple $125 million. Both Ripple and the SEC said they would appeal.
However, under the Trump administration the SEC is changing tack and has dropped many crypto cases. It couldn't do so in Ripple's case because the court had already made a decision. Instead, the two went hand-in-hand to ask the judge to drop the injunction and reduce the fine to $50 million.
The court refused. On June 26, in a blistering ruling, Torres said that none of the facts of the original case had changed. She quoted arguments made by the "old" SEC -- including that Ripple's "misconduct was reckless and likely to continue." Ultimately, the judge said rulings are made in the public interest and cannot be undone unless there are exceptional circumstances, which there were not.
The following day, Ripple Labs Chief Executive Officer Brad Garlinghouse said the company would withdraw its cross-appeal. The hope (and expectation) is that the SEC will follow suit. At that point, the case will be over, but the injunction and the fine will stand.
Image source: Getty Images.
What it means for investors
XRP's fell as much as 5% after the judge denied the motion. XRP then erased those losses in the following days after Garlinghouse announced that Ripple would drop its appeal. Given that XRP is up over 300% since Donald Trump won the presidential election, I'd argue that investor optimism about the end of the legal drag is already priced in, and another dramatic gain is extremely unlikely in the short term.
CRYPTO: XRP
Key Data Points
Longer term, the fact that it's continued to be a top crypto in spite of years of legal battles speaks to XRP's staying power. That said, it is hard to know how big an impediment the injunction on institutional sales has been. The injunction didn't stop Ripple from selling XRP directly to institutions -- it just required it to do that legally. But Ripple clearly wanted it lifted, which suggests it has some effect. That's all we know because, as a private company and crypto project, its finances are relatively opaque.
XRP's market cap of almost $130 billion feels high, even for crypto. To put it in context, it's double that of PayPal (PYPL +1.59%). When evaluating XRP as an investment, don't view it only through a crypto lens; look at how it compares to public payment companies as well. Not only are listed companies more transparent, they don't come with the baggage of court injunctions that haven't been lifted.
What's next for XRP?
With the court battle out of the way, XRP's growth depends on several factors. Here are some key indicators to watch:
- News that the SEC will also drop its appeal: The SEC is widely expected to drop its appeal, which would mark the real end to this chapter. Former SEC litigator Marc Fagel posted that it could take as long as a month or two for the SEC to schedule and vote on these types of decisions.
- Growth of Ripple's stablecoin: Ripple launched its own dollar-pegged stablecoin (RLUSD +0.00%) at the end of last year. The idea is that RLUSD will broaden the XRP ecosystem, and the two will grow together. But there is a risk that RLUSD (which is free from legal injunctions) will eat into XRP's market.
- Approval of XRP ETF: Several investment companies have submitted applications for XRP exchange-traded funds (ETFs). Bloomberg analysts think there's a 90% or more chance of approval for a number of crypto ETFs. A green light could open the way for increased institutional and retail investor interest in the project.
- Ripple partnerships: Ripple helps companies use the blockchain to move money and tokenize assets. It already has partnerships with several banks and companies. As U.S. lawmakers make progress with stablecoin legislation, Ripple's proven experience and stablecoin minting platform may attract more partners.
Need for more progress
Some speculated that XRP would soar once it shook off those legal shackles. However, the muted price action in recent days suggests that investors have expected this to happen since the election. For XRP to grow more, we need to see progress in other areas, such as more partnerships and the approval of an XRP ETF.
