Investor sentiment waned over the weekend. Several driving forces behind the recent crypto rally are on ice, leaving investors searching for the next catalyst.
For XRP, the SEC v Ripple case now hinges on the outcome of remedies-related discovery. Judge Analisa Torres ordered the parties to complete discovery by February 12, 2024. Investors may have little insight into the discovery process and may have to wait until the SEC and Ripple briefs with respect to remedies.
During the discovery process, the SEC will likely obtain the necessary information from Ripple to formulate a punitive penalty. Ripple must file its opposition to the SEC brief by April 12, 2024.
The markets may view the likely disgorgement for XRP sales to institutional investors by mid-April. As previously discussed, several case laws support a significantly lower quantum than the SEC’s aspiration of $770 million. As a reminder, the three case laws Ripple could cite include,
Liu vs. SEC: A disgorgement award must not exceed the total NET profits and must go to the victims.
SEC vs. Govil: SEC may not pursue a punitive disgorgement without proving investors suffered financial harm.
Morrison vs. National Australia Bank: The SEC only has jurisdiction over XRP sales to US institutional investors.
Ripple’s remedy-related brief may not only focus on whittling down total net profits considering the three case laws. Ripple may also highlight the lack of a regulatory framework and may even reintroduce the Hinman speech and Hinman speech-related documents.
Investors Abhor Uncertainty Despite the Odds
Ripple could eventually pay a penalty significantly less than its legal fees of $150 million. However, uncertainty remains the bedrock of the US digital asset space. A token disgorgement award based on total XRP sales to US institutional investors less expenses could rile the SEC.
Amidst the uncertainty about the payout is the likelihood of the SEC appealing the Programmatic Sales ruling.
Judge Torres rejected the SEC motion for interlocutory appeal. The rejection was a victory for Ripple on two counts. In addition to the court seeing no merit to an interlocutory appeal, Judge Torres took the opportunity to reinforce the original ruling. The reinforcement of the ruling could reduce the chances of a successful post-trial appeal through the appellate courts.
Nonetheless, there is always the chance of an SEC win on appeal. The uncertainty could linger until 2025. The SEC must wait until the case against Ripple ends before filing appeals.
Within the courts, another driving force is the ongoing SEC vs. Coinbase (COIN) case.
SEC vs. Coinbase: Oral Arguments on January 17, 2024
The SEC and Coinbase will attend court on January 17 for oral arguments relating to the Coinbase motion to dismiss (MTD).
Coinbase argued the SEC lacks the statutory authority to regulate crypto exchanges. In the preliminary statement of the MTD, Coinbase stated,
“Two years ago, recognizing that the SEC wanted but lacked statutory power to regulate crypto exchanges, Chair Gary Gensler asked Congress for a legislative mandate. None came. Now, without any intervening legislative act, the Commission accuses Coinbase—the largest US crypto exchange—of having “defied” the federal securities laws in failing to register as a securities exchange, broker, and clearing agency since 2019.”
It is worth noting that the SEC allowed Coinbase to go public in 2021 with the same business.
A ruling for the Coinbase MTD could materially impact the SEC’s powers to regulate by enforcement. On the other hand, Judge Katherine Failla could deny the motion, which could test investor resilience.
Amicus Curiae attorney John E. Deaton recently placed a significant emphasis on the Coinbase MTD, saying,
“The SEC will settle the case against Ripple if the court grants the Coinbase MTD.”
Notably, Coinbase has backing of a prominent Senator. Senator Cynthia Lummis filed an amicus curiae brief supporting the MTD. The brief stated,
“Through this case, the SEC seeks primary influence over economic, political, and legal questions under active consideration by Congress and multiple agencies. The SEC’s assertion of authority in this case is out of step with active legislative efforts.”