Jeremy Hogan of the Orlando (USA) law firm Hogan & Hogan explained what is the most likely worst-case scenarios for Ripple Labs in its case against the U.S. Securities and Exchange Commission (SEC). At the outset, he stated with regard to the assessment of XRP as a security under U.S. law that there can never be a blanket “determination.”
The status, he said, is always a snapshot in time. To underscore this argument, Hogan cited an analogy from former SEC chief Clayton during a 2018 speech:
“In his speech Clayton said that if someone sells you a token to allow you to use their laundromat, that is not a security. BUT if someone sells you and ten other people tokens they can use at a laundromat that is still being built and then uses the proceeds of the sale to build the laundromat and you expect to be able to sell the tokens to another guy with for more money once the laundromat is completed, THAT is a security.
But once the laundromat is built, any sales of tokens at that time are not sales of securities – those are just a kind of currency. So as Clayton says at the bottom of the story “Just because it’s a security today doesn’t mean it’ll be a security tomorrow.”
The lawyer thinks that “this is exactly what we’re seeing with the sale of XRP.” As more use cases for XRP are created and the XRP ledger becomes more decentralized, it is less likely that XRP will be a security in the future.
Like former SEC Commissioner Joseph Grundfest, Hogan also questions the “true motive” of the SEC’s action against Ripple. In his testimony, however, Hogan went in a different direction, agreeing with Ripple Labs CEO Brad Garlinghouse that there could be an “attack” on the whole crypto industry behind the lawsuit.
“If you wanted to control an industry that involves over a thousand different companies many of which are decentralized and difficult to control – which is the more efficient way to control it? Suing each company individually or by controlling the handful of large markets where those companies’ goods are traded?”
The worst-case scenarios for Ripple
Moreover, Hogan is optimistic that XRP will not be classified as a security. The SEC “did not file a request for a Declaration from the court that XRP is a “security,” which the SEC could have requested from the court but did not.” As a result, Hogan says:
“That clued me in that the effect of this lawsuit was going to be limited to monetary damages and effect only the XRP in escrow.”
Additionally, the lawsuit could end with no “clear winner,” as prior SEC lawsuits show. Like other legal experts, Hogan speculates that a settlement between Ripple and the SEC is the most likely outcome of the case. To understand what this might look like in a worst-case scenario, Hogan took his cue from the cases against Paragon and Kik Interactive.
In the Paragon lawsuit, there was a financial settlement and an injunction for violating securities laws. On the legal implications, Hogan noted:
“This clued me in that even a bad settlement would only effect the XRP held by Ripple in escrow and that was probably the sticking point in settlement negotiations.”
The lawsuit against Kik was litigated to the end by SEC and ended in a “100% defeat” for Kik. However, he added that this is exactly why the ruling is interesting, because it shows that “even in a worst-case scenario, there is still a mechanism for selling XRP in escrow that could allow Ripple to continue to expand its use of XRP while limiting Ripple’s “dumping” of XRP on the market.” On the most likely outcome, Hogan thus stated:
“My conclusion was that the MOST likely outcome of the SEC lawsuit would be a settlement involving a large fine or penalty for sales from 2013-14 and maybe 2015 and some sort of control or limitation on the sale of the escrowed XRP. And that’s a conservative conclusion on my part. That conclusion would hurt Ripple no doubt but would by no means be a deathblow.”