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SEC Drops Lawsuit Against Crypto Executives, Signaling Shift in Regulatory Landscape
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In a significant turn of events, the United States Securities and Exchange Commission (SEC) has decided to dismiss its lawsuit against two prominent cryptocurrency executives, Brad Garlinghouse and Chris Larsen. The executives were accused of overseeing $1.5 billion in sales of the digital currency XRP, marking a pivotal moment in the cryptocurrency industry’s ongoing battle against traditional regulatory oversight.

Boosting Confidence in Crypto Defendants

The dismissal of civil claims against Garlinghouse and Larsen signals a potential shift in the crypto industry, as it encourages affluent crypto defendants to challenge regulatory actions in a court of law. This move suggests that industry leaders are prepared to stand their ground in the face of government regulation. Simultaneously, the SEC’s withdrawal from this case allows the agency to conserve its resources for larger lawsuits filed against crypto giants, including Coinbase and Binance.


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Origins of the Legal Battle

The SEC initiated the lawsuit against Ripple, Garlinghouse, and Larsen in December 2020, when XRP was the third-largest cryptocurrency by market value. This lawsuit was critical in the SEC’s extensive campaign to regulate cryptocurrency through enforcement actions. The agency formally disclosed its decision to drop the case against the executives in a filing made in a Manhattan federal court.

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Crypto Industry’s Resistance to Traditional Regulation

The cryptocurrency industry has been vocal about its difficulties in complying with Wall Street-style regulations. Many crypto companies have settled with the SEC by paying substantial fines to resolve allegations of illegal securities sales. However, Ripple and its executives Garlinghouse and Larsen chose a different path, opting to take on the government in a legal battle.

The Stakes

Garlinghouse and Larsen had substantial financial incentives to defend themselves against the SEC’s allegations. Garlinghouse earned $150 million from his sales of XRP, while Larsen’s earnings amounted to $450 million. These financial resources allowed them to engage high-profile legal representation and challenge the regulatory body in court.

Comparing Lawsuits: Ripple, Coinbase, and Binance

The SEC’s legal actions against Ripple, Coinbase, and Binance vary in complexity. The Ripple case centered on whether XRP qualified as a security, whereas the lawsuits against Coinbase and Binance involved more intricate issues. An SEC spokeswoman declined to provide additional comments on this matter.

Partial Resolution and Ongoing Disputes

Ripple’s liability and specific claims against Garlinghouse and Larsen saw partial resolution in July. U.S. District Judge Analisa Torres in Manhattan ruled favor of Ripple, agreeing that approximately half of its XRP sales did not violate investor-protection laws. Nevertheless, Torres also sided with the SEC, determining that $728 million of Ripple’s sales constituted illegal sales of securities. Ripple still faces a hearing before Torres to assess the extent of its liability. Some claims against Garlinghouse and Larsen remained unaffected by the ruling and were scheduled for trial the following year.

Legal Reactions and Criticisms

Attorneys for the accused, such as Matt Solomon of Cleary Gottlieb Steen & Hamilton LLP, expressed their belief that the SEC’s case was without merit and that the agency erred in targeting Brad Garlinghouse. Martin Flumenbaum, an attorney for Chris Larsen, asserted that the SEC’s decision to drop the charges demonstrated that the initial civil charges should not have been filed.

Small Investors vs. Bigger Investors

The decision by Judge Torres stirred controversy among securities lawyers and consumer-protection advocates. Under her reasoning, small investors who used exchanges to buy XRP did not qualify for SEC oversight, while bigger investors who purchased XRP directly from Ripple did.

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Appeals and Ongoing Disputes

The SEC filed an early appeal of Torres’s decision, but the higher court’s approval for immediate review was not granted. Judge Torres defended her ruling, emphasizing that she correctly applied the test for determining whether a cryptocurrency asset qualifies as a security. After ruling on the fines Ripple must pay for its $728 million in sales to institutional investors, Judge Torres may face another appeal from the SEC.

Future Prospects

Brad Garlinghouse stated in an interview that Ripple would not be required to reimburse the entirety of the $728 million, as many sales were to overseas buyers not regulated by the SEC. Additionally, some transactions involved sophisticated American investors, exempt from SEC registration due to long-standing legal provisions. Garlinghouse emphasized that the money spent on Ripple’s legal defense was worth it “for the industry.”

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