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Ripple Creates Waves in SEC Defense: ETH is Unregistered Security Too

Ripple is a protocol that holds coins called XRP, which advertises as the most reliable and fastest digital asset for global payments. It’s not an ICO token or security of any kind. Ripple states that XRP “will always be open source.”

It is a fully functional currency that offers a better alternative to other cryptos, and Ripple doesn’t consider its security, but SEC argues on it. That means it doesn’t have to register with the SEC (or any other securities regulator). But if you’re wondering, how come Ethereum can be classified as unregistered securities while staying true to its open-source nature?

Decentralization Over Security?

The answer lies in something else: decentralization. The SEC argues that because Ethereum has no centralized authority, there is no legal person who could make representations about ETH… but what does Ripple have to do with it?

The SEC defines Ripple as a decentralized system in which the company holds around 6.2 billion of all XRP tokens.

However, in filing its defense, Ripple CEO Brad Garlinghouse humorously proposed that ETH be deemed unregistered for being controlled by a foundation.

Why else would large financial institutions be so interested in the coin if they didn’t pump it? And why would other companies be interested in using ETH, or creating new tokens on the ETH blockchain platform, if they weren’t being promised potentially significant returns?

Is It All About Competitive Advantage?

The point is that the biggest companies in the world only care about Ripple because it gives them a competitive advantage. If you don’t have XRP, you can’t connect to its network and offer payment-processing services globally. Banks who want to work with Ripple need XRP, so they buy up as much as possible from investors.

So while both ETH and XRP are open-source technologies, they’re controlled by two completely different entities – Ripple and Ethereum Foundation.

A Brief History of SEC vs. Ripple

SEC has been after Ripple and XRP for some time, arguing that significant holdings of XRP create an inherent centralized nature. On December 22, 2020, the SEC announced that it was taking action against Ripple Labs.

It’s also concerned with the fact that Ripple set a fixed limit on how many XRP exists. This means anyone who controls these tokens can have a significant influence on their price.

FinCen even fined the company $700,000 to offer XRP sales and allegedly market the token as “legal” when unregistered security.

In addition to this, Ripple has raised concerns about using its tokens to pay some of its partners. That could be interpreted as profiting from selling unregistered securities. However, many people think this is allowed because XRP isn’t considered security (people use Bitcoin for these purposes too).

Ripple’s Defense

In the company’s first response to SEC, Ripple said it would fight the fine and deny any wrongdoing. The reason? Most of the issues raised by the SEC are based on “fundamental misunderstandings of how Ripple works.”

According to SEC filing, these tokens are required to access the software and process transactions on the network. The problem is that it’s one thing to have a right to use a network and another thing to exercise the right.

Whether you’re using XRP or not doesn’t matter as much as how difficult it is for others to make use of your tokens. That’s why Ripple Labs may be subjecting its XRP token holders (including itself) to liability.

In January, Ripple filed its defense to the claims made by the SEC. In response, the company argued that it did not control the supply of XRP. Its tokens aren’t securities either because they are used as currency and a mechanism for providing incentives to operate consensus in an open, decentralized system. Ripple will likely combine both these arguments when its hearing comes. At the same time, it may try to raise the bar by arguing that ETH is unregistered security. This would allow Ripple to show how the SEC’s definition of security can be broadened and applied in different contexts.

What About Bitcoin?

SEC has exempted bitcoin and ether from similar regulations. Does that mean they’re not securities? SEC doesn’t consider bitcoin a security because its decentralized and open-source nature makes its monitoring too costly for anyone to regulate. It operates based on consensus, so you can do whatever you want as long as other people agree with you.

Many security companies define: “If someone creates an asset and sells it to others who use it, that is a security. But if the same person creates the asset and uses it themselves to play poker online, that is not security.”

The problem here is that Ripple’s system for trust in its token XRP isn’t decentralized at all. The company itself can easily control it. This raises some questions about Ripple’s defense of prohibiting regulation on their XRP token.

Conclusion

However, we do not yet know how it turns out to be in the future in the battle of Ripple vs. SEC, but both parties have good points to argue with each other. And many XRP admirers are patiently waiting for a final decision to come from the US securities and exchange commission regarding SEC charges.

Crypto enthusiast and early adopter, with a passion for video games.

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