The SEC vs. Ripple, Round One

On December 22, the Securities and Exchange Commission announced it was filing a complaint against Ripple and two of its executives, alleging they were conducting an unregistered securities offering.

The SEC vs. Ripple, Round One

The SEC’s complaint is based on the categorization of XRP as a security rather than a commodity. The Commission stated that Ripple, its co-founder Christian Larsen, and its former CEO Bradley Garlinghouse raised more than $1.3 billion through an unregistered securities offering.

The SEC alleges XRP sales were used to finance Ripple’s business. According to the head of the agency's Enforcement Division, "Ripple, Larsen, and Garlinghouse failed to register their ongoing offer and sale of billions of XRP to retail investors, which deprived potential purchasers of adequate disclosures about XRP and Ripple's business and other important long-standing protections that are fundamental to our robust public market system."

“Ripple created an information vacuum such that Ripple and the two insiders with the most control over it—Larsen and Garlinghouse—,” SEC officials stated, “could sell XRP into a market that possessed only the information [the] defendants chose to share about Ripple and XRP.”

Ripple countered the SEC’s claims, arguing that the agency’s move has harmed “countless innocent XRP retail holders with no connection to Ripple” and that it has unnecessarily “muddied” the regulatory framework for the whole crypto sector. The company also claims its customers are primarily abroad and has confirmed it will continue to support its products despite the SEC’s charges.

Shortly after the SEC’s announcement, a number of exchanges and asset managers delisted XRP and suspended trading. Priced close to $0.60 on December 19, the cryptocurrency plummeted to 0.18 after the SEC announcement, and it has only mildly recovered since reaching $0.23 on January 5., Coinbase, and OKCoin are among the platforms that suspended XRP trading. According to Arca executive Phil Liu, the SEC complaint is a death sentence for XRP. Liu predicts Ripple may become insolvent “if it can't raise money by selling XRP” in 2021. Techcrunch’s Michael Arrington is more hopeful about the cryptocurrency’s future. Arrington is confident that XRP is independent of Ripple, which is the target of the SEC’s charges. "Whatever happens to Ripple,” he said, “XRP will continue to exist."

The SEC stated that Ripple failed to inform investors about its “business operations and financial condition," a requirement for issuers of securities. The agency now seeks “injunctive relief, disgorgement with prejudgment interest, and civil penalties.”

Ripple has had an ongoing discussion with the SEC to determine whether XRP is a security, which requires SEC registration, or a currency, which is not regulated by the Commission.

Since the SEC chose to announce the lawsuit against Ripple right before Biden took office, one can speculate that it was politically motivated. In fact, the president-elect has shown signs of being more crypto-friendly than Trump. One of Biden’s candidates for heading the SEC is crypto-savvy Gary Gensler, who has previously stated that there is a strong case XRP is a security.

Garlinghouse has described the SEC’s suit as “an attack on the entire crypto industry and American innovation.” Whatever the SEC’s motivation may have been, trying to destroy one of the most successful crypto developers on the market is not the right way to foster transparency in the industry. Wherever there are regulatory concerns, innovators, entrepreneurs, and regulators must work together to create a legal framework that makes sense for both crypto companies and consumers.

Is XRP a Security?

The SEC has already ruled that Bitcoin and Ethereum are not securities. The argument is that because they are decentralized and no company is in control of them, they cannot be categorized as securities.

In the case of XRP, there is no mining. One hundred billion units were initially created in 2012. Ripple owns more XRP than anyone else, and its top executives also own a substantial amount. This situation, along with the fact that XRP’s value is greatly influenced by how well the company is doing, has led regulators to view the digital token as a company’s stock.

Garlinghouse argues that Ripple cannot tap reserve funds as it pleases and that XRP has become increasingly decentralized. He said the SEC’s claim that XRP is a security under Ripple’s control is akin to the notion that oil is a security under Exxon’s control.

If a federal judge rules that XRP is a security, this could mean a massive blow for the industry. Even before the SEC suit, Ripple had threatened to relocate to a country with a more lenient regulatory framework. The company’s recent legal troubles may speed up those plans.

For Garlinghouse, it makes no sense that the U.S. is going after Ripple, an American company, when Bitcoin and Ethereum are largely created in China. “I think we have to stand up for all of crypto—and not let the SEC bully the entire industry,” Garlinghouse said, “We’re going to be on the right side of history.”

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