Ripple’s grueling battle with the Securities and Exchange Commission is officially over.
In 2020, the U.S. Securities and Exchange Commission (SEC) sued a company called Ripple, alleging it was in breach of financial securities laws for the way it was issuing its cryptocurrency token, XRP (XRP 1.08%). The lawsuit threatened to derail Ripple’s business model, and it suppressed the price of XRP for years.
But everything changed when President Donald Trump was reelected last November. He promised to make America “the crypto capital of the world,” which involved taking a friendlier approach to regulation. He appointed crypto-advocate Paul Atkins to run the SEC, and the agency has since withdrawn from several active cases against industry giants like Binance and Coinbase.
The SEC also dropped its case against Ripple in August, bringing the brutal five-year legal battle to an official end. Here’s what might be in store for XRP from here.
Image source: Getty Images.
Why the SEC sued Ripple
Ripple created a unique payments network called Ripple Payments. It facilitates instant cross-border transactions by enabling global banks to deal with one another directly, no matter what existing infrastructure they use. Without Ripple Payments, banks using the SWIFT (Society of Worldwide Interbank Financial Telecommunication) network would have to use an intermediary to send money to banks that don’t use the system, delaying payments by several days.
Ripple created XRP as a bridge currency to standardize each transaction within Ripple Payments. For example, an American bank might send XRP to a European bank rather than sending U.S. dollars, cutting out costly foreign exchange fees. The cost of a single transaction using XRP is typically 0.00001 of a token, which is a fraction of one U.S. cent.
XRP has a total supply of 100 billion tokens. There are 59.6 billion in circulation, and the rest are controlled by Ripple, which gradually releases them to meet demand. As a result, XRP is a centralized cryptocurrency. Decentralized cryptocurrencies like Bitcoin (BTC 0.08%) aren’t controlled by any person or company, and they are typically earned through a process called “mining.”
That’s why the SEC sued Ripple in 2020. The regulator argued that XRP should be classified as a financial security, just like stocks and bonds, which are also issued by companies. This would have forced Ripple to operate under a very strict regulatory framework, potentially derailing its business model.
In August 2024, a judge issued a ruling that mostly favored Ripple. The SEC lodged an appeal which could have dragged the legal battle on for several more years, but the Trump administration’s pro-crypto agenda changed things. The Atkins-led SEC officially dropped the appeal last month, formally closing the case.
Here’s what might happen next
XRP hit a new record high in July for the first time in seven years, in anticipation of Ripple’s settlement with the SEC. Bullish sentiment was also fueled by the approval of a new exchange-traded fund (ETF) called the ProShares Ultra XRP ETF on July 18. It invests in futures contracts, so it doesn’t own any XRP directly. But investors are speculating that regulatory approval for spot ETFs could follow, and those funds would start buying up XRP tokens.
There is some precedent, because futures-based Bitcoin ETFs came before spot ETFs, so investors are hoping XRP follows the same path. This proved to be very bullish for Bitcoin because many investors already viewed it as a legitimate store of value, so ETFs gave financial advisors and institutions a safe, regulated way to own it.
I’m not convinced that spot ETFs would have the same effect on XRP, because it doesn’t have a proven reputation as a store of value. It’s a bridge currency in the Ripple Payments network, and ETFs wouldn’t improve that use case at all.
That brings me to a crucial point. Ripple Payments supports the use of fiat currency, so banks don’t have to use XRP. This means that the success of the network won’t necessarily lead to a higher value per token over the long term.
Therefore, if Ripple Payments isn’t a reliable value creator for XRP, and ETFs fail to become a tailwind like they are for Bitcoin, then volatility is likely to be the overriding theme from here. When XRP hit its previous record high in 2018, it plunged by more than 90% over the following year.
The token is in a better position today, but I don’t see a clear fundamental case for sustainable long-term upside from here, which leaves investors exposed to potential price corrections in the future.
Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin and XRP. The Motley Fool recommends Coinbase Global. The Motley Fool has a disclosure policy.