New York Lawsuit to Decide Regulation of Cryptocurrency
NEW YORK — A key lawsuit pending in New York is moving toward a judgment expected to influence the extent the booming cryptocurrency market can remain largely unregulated.
The Securities and Exchange Commission argues that Bitcoin, Ethereum and other cryptocurrencies are a form of security, which should give the government a right to oversee parts of how they operate.
In the case against Ripple Labs Inc., the agency says the company and two of its executives raised over $1.3 billion through an unregistered digital asset securities offering. The two executives are significant shareholders in the company.
“The registration requirements are designed to ensure that potential investors — including, importantly, retail investors — receive important information about an issuer’s business operations and financial condition,” the SEC said in a statement. “Here, we allege that Ripple and its executives failed over a period of years to satisfy these core investor protection provisions, and as a result investors lacked information to which they were entitled.”
The SEC seeks penalties against Ripple Labs for what it says was a violation of the registration provisions of the Securities Act of 1933.
Ripple Labs argues that as a dealer in cryptocurrency, it has done nothing wrong. The federal securities laws should not apply to its transactions, the company’s attorneys say.
Cryptocurrency is a digital currency designed to work as a medium of exchange through computer networks that do not depend on any central authority, such as a government or bank, to uphold it.
More government intervention could destroy the basis of cryptocurrency as an investment that has led to its meteoric rise in value, according to the financial industry.
Attorneys in the case plan to wrap up their fact-finding, or discovery, in the case within weeks. Their latest flurry of court filings is addressing which SEC documents can be released publicly and which ones are privileged government documents.
Early indications from the discovery process indicate Ripple Labs is making favorable progress in its case. It won access in a ruling last month to handwritten SEC notes that could be interpreted to mean agency officials knew mainstream cryptocurrencies are not subject to securities laws.
The SEC has tried to shield some of its documents on the theory public disclosures could inhibit the government’s ability to consider relevant issues in its decision-making.
Ripple is one of the biggest companies among cryptocurrency exchanges. Its flagship cryptocurrency is called XRP.
The case is SEC v. Ripple Labs Inc. et al. in the U.S. District Court for the Southern District of New York.
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