The U.S. Securities and Exchange Commission (SEC) believes Ripple Labs violated federal securities laws in selling the XRP cryptocurrency to retail consumers.
According to a lawsuit filed Tuesday, Ripple raised $1.3 billion over a seven-year period to retail investors through its sale of XRP (-2.07%) on an ongoing basis. Ripple CEO Brad Garlinghouse announced Monday that the SEC had told his company of the impending lawsuit, and published the payment firm’s Wells Response, a document that seeks to tell the SEC why certain activity did not violate U.S. securities laws.
The San Francisco-based fintech firm has long maintained that XRP the cryptocurrency is separate from Ripple the company. The cryptocurrency was often referred to as “ripple” through early 2018 and shared a logo with the company until later that year.
The impact could be wide-ranging: several exchanges list XRP in the U.S., with only one deciding to delist the cryptocurrency ahead of the Tuesday lawsuit. If the SEC prevails, platforms that continued to list the crypto may have to register as securities exchanges.
According to the complaint, which names CEO Brad Garlinghouse and Chairman Chris Larsen in addition to Ripple Labs as defendants, Ripple violated Sections 5(a) and 5(c) of the Securities Act of 1933 by failing to register XRP as a security or seeking an exemption.
“Over a years-long unregistered offering of securities (the ‘Offering’), Ripple was able to raise at least $1.38 billion by selling XRP without providing the type of financial and managerial information typically provided in registration statements and subsequent periodic and current filings,” the filing said. “Ripple used this money to fund its operations without disclosing how it was doing so, or the full extent of its payments to others to assist in its efforts to develop a ‘use’ for XRP and maintain XRP secondary trading markets.”
XRP’s status under U.S. securities law has been a subject of debate for several years.
The Crypto Rating Council, a joint venture spearheaded by Coinbase and supported by cryptocurrency exchanges like Bittrex, Kraken and OKCoin, among other entities, assessed that XRP looked more like a security than a non-security.
The group has specified that its ratings should not be taken as legal advice, but rather its members’ assessment of how different cryptocurrencies might fall within the U.S. regulatory umbrella. CrossTower, one of its members, delisted XRP earlier Tuesday after news of the lawsuit first came out, though other trading platforms have yet to weigh in on whether they’ll consider doing so.
XRP allegedly being centralized through control by a single entity was even seen as an attractive aspect by some. Wall Street veteran Brian Kelly told CNBC in 2018 that, “I happen to like the fact that they have several banks using it and they have a company … that is out there trying to make the value of the currency go higher.”
See also: An SEC Victory in Ripple Case Would Render XRP ‘Untradeable,’ Market Pros Say
On the other hand, former Commodity Futures Trading Commission (CFTC) Chairman Christopher Giancarlo has said that in his view, XRP should be “considered a currency or a medium of exchange,” not a security.
Giancarlo cited the Howey Test – a Supreme Court case that has been used as a chief standard for assessing whether or not something is a security – in his reasoning.
In short, Howey states that something is a security if it 1) is an investment of money in b) a common enterprise with c) a reasonable expectation of profits derived from the efforts of others. According to Giancarlo, XRP investors were not promised returns or a share of Ripple’s profits.
The SEC sees it differently.
“At all relevant times during the Offering, XRP was an investment contract and therefore a security subject to the registration requirements of the federal securities laws,” the lawsuit said.
According to the SEC, the defendants allegedly said that the main reason someone might buy XRP is to speculate on its price, with the complaint quoting Ripple employees from as far back as 2013.
“Similarly, in its official application to the NYDFS for XRP II in 2016, Ripple acknowledged that buyers were ‘purchasing XRP for speculative purposes,’” the complaint said.
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