Judge Orders Ripple to Submit Financial Records in SEC Lawsuit

Not only is the SEC making progress in its case against Ripple, but BlockFi and 3AC were able to reach a settlement in their own case while the UK is advancing its stablecoin regulations.

The legal system in the U.S. and internationally has been very busy dealing with crypto. A federal judge recently ruled in favor of the SEC, pushing Ripple to produce financial documents and details on "institutional sales" of XRP. Meanwhile, BlockFi reached a settlement with the defunct crypto hedge fund 3AC, resolving financial disputes in a sealed agreement approved by a New Jersey Bankruptcy Court. Additionally, the UK is advancing its regulation of stablecoins, with the Bank of England and the Financial Conduct Authority seeking industry feedback on some proposed oversight measures, aiming to implement regulations by 2025.

SEC Gains Ground in Ripple Case

A federal judge recently approved an order compelling Ripple to hand over financial documents spanning 2022 to 2023 to the United States Securities and Exchange Commission (SEC), as well as details on contracts related to "institutional sales" of XRP. This move by Magistrate Judge Sarah Netburn of the U.S. District Court for the Southern District of New York is aimed at scrutinizing whether XRP can be classified as a security, which has been a central question in the lawsuit filed by the SEC.

The legal tussle began in December of 2020 when the SEC accused Ripple, along with its executives Brad Garlinghouse and Chris Larsen, of conducting unregistered securities offerings through the sale of XRP tokens. The agency's latest motion attempts to access post-complaint contracts to challenge Ripple's assertion of compliance with regulatory standards post the initial lawsuit filing. Judge Netburn, believing in the relevance of the requested information for the court to get to an appropriate conclusion, has given Ripple until Feb. 12 to comply with the order.

In July of 2023, Ripple received a favorable summary judgment, with the court ruling that XRP was considered a security solely when sold to institutional investors. This judgment led to the SEC dropping its case against Garlinghouse and Larsen, though not against Ripple itself. The trial is set to commence in April.

The backdrop of this legal battle includes broader enforcement actions by the SEC against some big U.S. crypto exchanges like Coinbase, Kraken, and Binance. Because of this, Ripple's chief legal officer, Stuart Alderoty, has vocally criticized the SEC for what he sees as regulatory overreach.

Adding to the drama, in January of 2024, Chris Larsen's personal XRP wallets were hacked, which resulted in a theft of about $112 million worth of the token, making it one of the year's biggest security breaches. However, Binance managed to freeze $4.2 million of the stolen funds on Feb. 1.

Meanwhile, a United States judge approved a settlement between crypto lender BlockFi and the now-defunct crypto hedge fund Three Arrows Capital (3AC), bringing an end to their legal disputes. The settlement was reached to resolve claims with BlockFi alleging that 3AC owed it $129 million, while 3AC countered with claims that BlockFi owed it $280 million. The approval came during a Feb. 6 hearing by New Jersey Bankruptcy Court Judge Michael Kaplan, who decided to keep the details of the settlement sealed, despite objections.

Judge Kaplan believes that unveiling the settlement terms would be "counter-intuitive" and dismissed the U.S. Trustee's objection, which demanded disclosure on the grounds that the debtors had not justified the need for confidentiality. BlockFi's request to seal certain details was based on their argument that the information was commercially sensitive and could even potentially influence litigation against the bankrupt crypto exchange FTX.

This resolution allows BlockFi to proceed with its plans to distribute assets from its lending estate to creditors, a critical aspect of the company's restructuring efforts. Judge Kaplan previously greenlit BlockFi’s amended Chapter 11 and customer repayment plan in September of 2023, facilitating the firm's liquidation process. At that time, it was estimated that BlockFi owed as much as $10 billion to over 100,000 creditors, including $1 billion to its three largest creditors and $220 million to 3AC.

Adding to the saga, OPNX, a crypto bankruptcy claims platform launched by 3AC co-founders Su Zhu and Kyle Davies, announced that it will stop its operations by Feb. 14.

UK's Approach to Stablecoin Oversight

In other legal news, the United Kingdom is taking big steps towards regulating stablecoins as part of its much broader strategy to oversee crypto-assets. In a move to gather insights and opinions from the financial sector, the Bank of England (BOE) and the Financial Conduct Authority (FCA) released discussion papers on Nov. 6, targeting different aspects of stablecoin regulation. Originally set for Feb. 6, the BOE has decided to extend its comment period to Feb. 12, while the deadline for the FCA remained unchanged.

The BOE's discussion paper focuses on the systemic implications of sterling-backed retail-focused stablecoins in payment systems, covering transfer functions and requirements for wallet providers. The FCA's paper also spans a variety of stablecoin uses, placing emphasis on auditing and reporting, prudential requirements, backing, and custodianship, and advocates for the principle of "same risk, same regulator outcome," ensuring that similar risks are managed under similar regulatory frameworks.

One of the notable points of dual regulation includes custodianship, where the FCA is expected to take the lead. However, the BOE suggested it might impose additional requirements in specific scenarios, like off-chain transactions and compliance with Anti-Money Laundering and Know Your Customer protocols for unhosted wallets.

The Association for Financial Markets in Europe (AFME) has actively engaged with the proposed regulations, submitting comments to the FCA by the initial deadline. James Kemp, AFME's managing director of technology and operations, praised the proposals as a positive development but also raised concerns about the treatment of securities tokens.

According to Kemp, securities tokens, which are already regulated under existing financial services regulations, should not be subjected to separate regulations proposed by the FCA for stablecoins. He stressed the need for consistent treatment across their lifecycle to maintain market functionality.

Additionally, the AFME suggested delaying parts of the FCA's proposal concerning stablecoins issued overseas until international frameworks are established and foreign markets mature a bit more. The regulations for stablecoins are anticipated to be implemented in 2025.