What if a cryptocurrency that was once positioned as a regulator-friendly alternative to Bitcoin receives heat from regulators? Exchanges trading XRP are about to find out.
U.S.-based cryptocurrency exchanges are required to consider delisting XRP in the light of a Securities and Exchange Commission (SEC) lawsuit alleging it is an unregistered security issued by Ripple Labs to raise funds has been.
Most notable among these exchanges is Coinbase, which, in addition to the normal considerations for listing XRP, also obtains SEC approval to list its shares and allow private investors to trade them. If the SEC prevails in their lawsuit, XRP can be classified as a security, which means that under US law, companies that offer it for trading must register as stock exchanges.
It's also possible that an SEC victory would destroy XRP's value as the regulator wants to prevent Ripple from selling more tokens, and Ripple, CEO Brad Garlinghouse and Chairman Chris Larsen have to distribute their profits, pay bias interest and pay civil penalties .
While some exchanges, market makers, and funds have already begun delisting XRP or ending positions and transactions in the cryptocurrency, this may not be a black and white issue for larger exchanges.
Anthony Tu-Sekine, partner at the law firm Seward & Kissel LLP, told CoinDesk that trading platforms like Coinbase are "between a rock and a hard place".
"You can continue to list XRP based on your previous analysis that XRP is not a safety in the hopes that a court will find that XRP is not a safety," he said. "Or they can take remedial action, such as restricting or withdrawing the trade in wallets held by US persons."
Exchanges like Coinbase would be "crazy not to consider," said Gabriel Shapiro, an attorney for Belcher, Smolen & Van Loo LLP. However, considering the question is not the same as actually deleting or not deleting the cryptocurrency.
"You have to consider – also from a business point of view, but also from a legal point of view – what precedent you are creating," he said. "If you delist a (cryptocurrency) just because a regulator accuses you of being collateral, what happens the next time it happens? Have you just given the SEC the right to remove something from your platform just because it's an accusation? "
Delisting digital assets on this basis may not be very good for the exchange's customers, Shapiro said.
"It's not an easy decision for (Coinbase) to just delist, and if I were them personally I wouldn't delist unless I had something more specific to point out," he said.
A Coinbase spokesman declined to comment on this article.
XRP price has rebounded on the news of the SEC case against Ripple
What might happen
Coinbase in particular is in a unique position due to its upcoming initial public offering (IPO) or direct listing. It already has its S-1, a form that companies use to register their stocks as securities. The SEC can provide feedback to the company on how it assesses potential risk factors or other aspects of its business.
Last week, Shapiro told CoinDesk that this could essentially result in companies being forced to take certain actions. While he states that he doesn't believe the SEC would specifically ask Coinbase to delist XRP, the agency could say that not delisting XRP could be a risk factor.
“You could say, 'In your Risk Factors, you didn't properly explain to your investors how to get XRP and others to trade on Coinbase when you went public … you really need to be really clear about that … including that we could get on with you here, Coinbase, because you were warned, ”he said.
Coinbase could then decide to delist XRP based on this feedback, or if the compliance burden is too high, it could even ruin its IPO ambitions.
What Coinbase can't do is pretend not to know how the SEC sees XRP, Tu-Sekine said. The agency's position is clear.
The SEC appears confident about its chances and has helpful precedents from its cases against Telegram and Kik, Shapiro said.
"I think we all suspected there would be a strong case, but I don't think we realized the extent to which Ripple had market-making arrangements," he said of the allegations in the SEC's complaint.
Read our ongoing coverage of the SEC v Ripple case and its impact on the industry.