NEW YORK (Legal Newsline) - What was once thought to be a $2 billion lawsuit that could change the cryptocurrency market forever might now end up being a $10 million hiccup for Ripple Labs, which says the federal agency desperate to regulate its product is being unreasonable.
The Securities and Exchange Commission wants $2 billion from Ripple, which sold XRP on public exchanges, arguing Ripple did not register to sell securities. Critics say cryptocurrency is not a security, rather a traditional paid-for product. A New York federal judge last year ruled XRP sold on public cryptocurrency exchanges weren't securities, dealing the SEC a significant setback.
Judge Analisa Torres did find that $729 million sold to hedge funds and institutional buyers violated securities laws. Now she's tasked with determining an appropriate penalty, after which the SEC could appeal her earlier order.
The SEC, which has been sued over its position that cryptocurrency is under its jurisdiction, claimed in March that because sales of XRP have actually increased in the three-plus years the case has been pending, it is "well-positioned to pay a significant civil penalty." It wanted the "return of the ill-gotten gains," too.
But pointing at the SEC's recent settlement with Terraform Labs, Ripple argued in a letter to Judge Torres that the maximum penalty should be $10 million.
Terraform disgorged more than $3.5 billion and then went out of business, and it also paid a $420 million civil penalty. Ripple says the total figure forked over represents about 1.27% of Terraform's $33 billion gross sales.
"The civil penalty sought by the SEC in Terraform demonstrates the unreasonableness of the civil penalty sought by the SEC in this case," Michael Kellogg of Kellogg Hansen wrote for the company June 13 to Torres.
The SEC's civil penalties in comparable cases have ranged from 0.6% to 1.8% of gross sales, Ripple said.
"Here, by contrast, the SEC seeks a civil penalty far exceeding that range, even though there are no allegations of fraud in this case and Institutional Buyers did not suffer substantial losses," Kellogg wrote.
"Terraform thus confirms that the Court should reject the SEC's disproportionate and unprecedented request and that an appropriate civil penalty would be no more than $10 million."
SEC chief Gary Gensler has waged war on the crypto industry since his appointment by President Biden. Obviously, the industry has not appreciated it, and neither have members of Congress.
The House of Representatives in May passed the FIT21 Act, addressing regulatory clarity in the digital asset ecosystem. Though Republican-led bills passing the House are not major surprises, FIT21 received support from 71 Democrats, including Nancy Pelosi and minority whip Katherine Clark.
The bill gives jurisdiction over restricted digital assets to the SEC and the Commodity Futures Trading Commission would regulate digital commodities.
Digital commodities would be defined as currency that is open to all participants equally or acquired through a digital commodity exchange.
The industry has maintained crypto tokens are not securities. The company Consensys has sued the SEC in Texas federal court over the SEC's attempt to regulate its blockchain network Ethereum.
"The (SEC) seeks to regulate ETH as a security, even though ETH bears none of the attributes of a security - and even though the SEC has previously told the world that ETH is not a security, and not within the SEC's statutory jurisdiction," the complaint says.
"This is the latest step in the SEC's recent campaign to seize control over the future of cryptocurrency, one of the fastest-growing and most innovative technologies in the world."