SEC’s Ripple Suit Shows Bumpy Road In Defining Crypto

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The road to mainstream acceptance of cryptocurrencies will still have its bumps, its potential roadblocks set in place from regulators. At the heart of it all might lie a jousting existential in nature — namely, between the companies that create and issue cryptos and the agencies that regulate them. And the existential conversation, and argument, centers on just what cryptos are, and what they are not.

News came this week that the United States Securities and Exchange Commission has filed suit against Ripple over its XRP cryptocurrency. The SEC has charged that Ripple held a $1.3 billion unregistered securities offering, and named CEO Brad Garlinghouse and Co-Founder Chris Larsen in the suit.

As reported by CNBC, the suit hinges on the contention that the crypto — the third largest as measured in terms of market value before a double-digit percentage slide in its value to 34 cents — is a security, not a currency, and thus is regulated by the SEC.

“We allege that 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,” Stephanie Avakian, director of the SEC’s Enforcement Division, said in a statement as reported by CNBC.

Ripple, for its part, has stated that XRP is indeed a currency, and need not be registered through the SEC for the offering.

Delving into the complaint, the SEC alleges that “From at least 2013 through the present, [Ripple and the defendants] sold over 14.6 billion units of a digital asset security called ‘XRP,’ in return for cash or other consideration worth over $1.38 billion to fund Ripple’s operations and enrich Larsen and Garlinghouse.” Garlinghouse and Larsen, alleged the SEC, made the sales without the registration — but there’s no exemption from that registration. Absent that registration, investors do not get the “material information that every year hundreds of other issuers include in such statements when soliciting public investment.” The result is that an “information vacuum” was created.

Separately in the filing, the SEC noted that Ripple had been advised by an international law firm that “XRP was unlikely to be considered ‘currency’ under the Exchange Act because, unlike ‘traditional currencies,’ XRP was not backed by a central government and was not legal tender.” Elsewhere, the SEC stated that the sales of XRP did not make note of its sale for a particular “use” or “currency.” XRP, according to the SEC, is an “investment” contract — tied to trading volumes and price action.

Non-Investment Use?

“No significant non-investment ‘use’ for XRP exists, and Ripple did not sell XRP in the offering for ‘use’,” said the SEC.

As noted in this space, as Ripple stated that it anticipated a suit against the firm, Garlinghouse has called the suit “not just Grinch-worthy, it’s shocking,” in an interview with Fortune. “It’s an attack on the entire crypto industry and American innovation.” There had been speculation over whether the company would relocate its operations outside the U.S. due in part to the regulatory climate.

Ripple has its own document out, which in response to the SEC declares that XRP is a currency.

“XRP is a currency, as the DOJ and FinCEN determined in 2015. Currencies are excluded from the statutory definition of a security. Digital assets like XRP that operate as a medium of exchange, unit of account, and/or a store of value are properly categorized as currencies. XRP’s functional characteristics and longstanding utility as a replacement for fiat currency require that it be categorized as a currency and not a security,” Ripple asserted.

Elsewhere, Ripple stated that “by alleging that Ripple’s distributions of XRP are investment contracts while maintaining that bitcoin and ether are not securities, [the SEC] is picking virtual currency winners and losers, destroying U.S.-based, consumer-friendly innovation in the process.” Because XRP is traded between fiat and other virtual currencies on more than 200 exchanges globally, “the vast majority of which have no connection to Ripple whatsoever,” XRP cannot be considered an investment contract.

Get ready for 2021 to be one spent answering some existential questions about what crypto “is” — and what the “is” is used “for.”

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