Ripple (XRP) has been gaining ground in crypto markets over the past several months, briefly overtaking Ethereum as the second largest coin by market cap, all while fighting an ongoing class-action lawsuit claiming XRP is a security.
Lawsuit Claiming XRP is a Security Could be Moving to Federal Court
On Nov.7, 2018, lawyers representing Ripple filed a notice of removal to have the class-action lawsuit moved from a California state court up to a federal court, according to Law.com.
The first lawsuit claiming XRP is a security was brought forth in May this year by investor Ryan Coffey on behalf of ‘all investors who purchased Ripple tokens (“XRP”)’. It claims that XRP is a security as defined by the US federal securities laws and asks for compensation of legal fees as well as punitive damages from the company and its CEO Brad Garlinghouse. It also asks for a trust to be placed over the assets and funds the company has raised through the sale of XRP which would severely limit the company’s operating ability.
Subsequently, three other similar lawsuits were filed against Ripple and the four suits have since been consolidated into a single class-action lawsuit.
The original suit by Coffey identifies that he purchased 650 XRP on Jan. 5 for $2.60 and sold the tokens on Jan. 18 for $1.70, sustaining a loss of approximately $551.89 or 32% of his investment.
While the amount lost by Coffey is not a large sum of money and pales in comparison to what some investors lost in crypto markets this past year, the lawsuit could have significant ramifications beyond just the damages that Ripple would have to pay.
If the lawsuit claiming XRP is a security is successful it would set a precedent and could allow the US Securities and Exchange Commission (SEC) to take further action against Ripple and others in the crypto industry. If the recent settlement between the SEC and the previous owner of the EtherDelta exchange is any guide then if XRP is classified as a security, any exchange that allows trading of XRP could also face repercussions.
The attempt to move the class-action lawsuit up to federal court indicates that Ripple’s legal team believes there is a better chance to win the suit in the higher court. In fact, according to Coindesk, the plaintiffs in the case have already filed a notice to indicate they will file a motion to keep the case at the state level.
This isn’t the only lawsuit that Ripple has been battling this year. A lawsuit filed by the R3 Consortium in Sept. 2017 accused Ripple of breaking a purchase agreement between the two but was recently settled for an undisclosed amount.
XRP Has Been Performing Significantly Better over the Past 3 Months
Despite the ongoing legal actions the company has been facing, XRP has had a positive run recently when compared to many other crypto assets.
The token is up over 90% for the past 3 months compared to the top 10 coins by market capitalization, which on average are up only 2% over the same time period.
Relative Performance of Top 10 Coins by Market Cap Over Past 3 Months
Some of the recent performance could be due to rumours that Ripple would be teaming up with their primary competitor, the Society for Worldwide Interbank Financial Telecommunication (SWIFT). SWIFT is the incumbent platform used by almost all banks to transfer funds internationally among themselves.
Both of Ripple’s primary products, xCurrent and xRapid, are intended to disrupt SWIFTs monopoly on cross-border transactions. While both xCurrent and xRapid are able to facilitate cross-border transactions faster and cheaper than the current SWIFT solution, only the xRapid product utilizes Ripple’s token, XRP.
Both sides have denied the rumour of a partnership, with SWIFT doing so through a statement to Finance Magnates and Ripple CEO Brad Garlinghouse speaking to the rumour in a recent interview on Bloomberg.
Perhaps the reason for the continued performance of XRP has been more about the success of Ripple signing on banks to trial its technology as a potential replacement to SWIFT rather than a partnering with their rival. As Garlinghouse told Bloomberg, he feels that SWIFT’s customers are speaking with their actions:
However, not all of Ripple’s customers are taking advantage of XRP as they are utilizing the xCurrent solution as opposed to xRapid. So, although these deals are positive for the company, they are not necessarily an indicator of the success or value of XRP.
Regardless of whether Ripple’s customers are utilizing XRP for their cross-border payments or not, if XRP were to be declared a security it would severely limit the company’s access to capital and ability to operate. It could also open the door to SWIFT and other rivals to innovate in the cross-border payments space.
Given that revenues from global payments are expected to top $3 trillion within 5 years, according to McKinsey, the prize is certainly worth vigorously defending the lawsuit claiming XRP is a security.