As the cryptocurrency sector blossomed, along with concerns about fraud, money laundering and other misuse, the U.S. Securities and Exchange Commission picked up its hammer and aimed it at the nail that stuck out the most — the billions of dollars raised in initial coin offerings.

Claiming that ICOs are really mostly thinly-veiled securities offerings, the agency has filed dozens of legal actions over the past few years, and won more than $60 million in civil penalties against companies like Block.One and Telegram for failing to meet registration requirements, according to Coindesk. Canadian mobile messaging company Kik also agreed to pay $5 million last year to end a legal dispute over an ICO for its cryptocurrency Kin.

But now the regulator seems to have met its match in its latest big crypto target, Ripple. The company has sold nearly $1.4 billion in XRP.  The SEC alleges in court that these were unregistered securities, used to fund the company and to enrich CEO Brad Garlinghouse and co-founder Chris Larsen.

The company and its executives — along with more than 10,000 XRP holders — are fighting back, asserting that XRP is a not a security but a virtual currency (a special distinction granted to Bitcoin and Ether). And they have put the regulator on the defensive.

After a Manhattan federal judge appeared to give XRP holders a tentative green light to seek information from the SEC about how it evaluated XRP, Bitcoin and Ether, the agency bristled in response. In a court filing Monday, the SEC (an agency well-known for lengthy, complex regulations and onerous filing requirements) called the request “disproportionate, over broad and unduly burdensome.”

“Facts about two digital assets that are not at issue in this case are irrelevant to the question here: did Defendants offer and sell XRP as a security?” Lawyers for the agency told U.S. Magistrate Judge Sarah Netburn. “The focus is on XRP and Ripple, not on other digital assets (or the SEC).”

A lawyer for the XRP holders blasted the agency for bringing the suit, which caused the price of the cryptocurrency to collapse, and resulted in as much as $15 billion in losses.

At issue are recent precedents, secured from a series of elderly New York judges (Alvin K. Hellerstein, 87; Raymond Dearie, 76; and Kevin Castel, 70), establishing that digital coins can still be legally classified as “securities” even if they resemble Bitcoin or Ether or even if other federal agencies, such as the Department of Justice, call them “currencies.”

Under something called the Howey Test created by the Supreme Court in 1946, agreements are “investment contracts” subject to securities regulation no matter what they are called, as long as they involve expectation of profits from an investment in a common enterprise, or of profits coming from efforts by a third-party promoter.

Still, Ripple and XRP holders are continuing to build public support for their case. This week, Ripple published a white paper describing how the company’s technology could play a role in the development of central bank digital currencies — virtual coins granted a stamp of approval as fiat money. The company cast XRP in the role as a potential “natural bridge currency” allowing for seamless cross-border transactions.

“To enable a truly efficient global market, a bridge currency must be specifically optimized for payments and support the same speed, scalability, low cost and security that CBDCs will provide,” Ripple said in its paper. “One example of a neutral bridge is the digital asset XRP, which can be used to bridge two different currencies quickly and efficiently.”

In the public sphere, the SEC is starting to take flak over its uncompromising stance with many crypto firms.

The agency’s former chair Mary Jo White, now in private practice and defending Ripple, has said the SEC is “dead wrong legally and factually” about XRP, which traded in cryptocurrency exchanges all over the world.

Speaking more generally, former federal prosecutor Katie Haun, who once specialized in investigating digital currency fraud, told angel investor Tim Ferriss in a recent interview that overzealous regulators may “run the risk of offshoring or chilling” crypto activity. As crypto entrepreneurs seek opportunities outside of the U.S., the shift could become a “national security threat,” said Haun, who is now partner at venture capital firm Andreessen Horowitz.

“I’m starting to see the beginning of it happening already,” Haun told Ferriss.

And SEC Commissioner Hester Peirce, a Trump administration appointee, has become more outspokenly critical of the agency’s draconian attitude toward crypto, encouraging it to approve a Bitcoin ETF.

"We've dug ourselves into a little bit of a hole," Peirce said last week in an interview with Blockchain Policy Matters. "A lot of people are looking for a way to access the asset class."

Maybe the tide will turn for Ripple.

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