When the US Securities and Exchange Commission (SEC) filed a lawsuit against Ripple on the 22nd, it revealed that Ripple has sold XRP to individual investors over the past seven years and made $1.3 billion. Ripple CEO Brad Garlinghouse said that the SEC notified Ripple about the lawsuit a day before the lawsuit was publicly disclosed, and in a Wells Response, a primary refutation, that Ripple did not violate US securities laws.
Until now, Ripple has argued that XRP is separate from Ripple. XRP was called’Ripple’ until early 2018, and after that it used the same logo as Ripple.
This lawsuit could have an impact across the cryptocurrency industry. Only one of the exchanges selling XRP in the United States has stopped selling XRP. If the SEC wins, exchanges that continue to sell XRP may have to register as a stock exchange with financial authorities.
In a complaint, the SEC alleges that Ripple violated Articles 5(a) and 5(c) of the Securities Act of 1933 by not registering XRP as a security or applying for an exemption from registration. Ripple Labs is listed as the defendant.
“Ripple has earned $1.38 billion by selling XRP for years, through the offering of undocumented securities, without disclosing financial and management information that must be provided by regularly reporting to authorities and filing documents. Ripple used the money it earned for business operations without any business disclosure or payment related matters, and through this, we wanted to develop XRP use cases and operate the XRP secondary trading market.” – SEC complaint
An ongoing debate
XRP’s position in US securities law has been the subject of debate over the past few years.
The Crypto Rating Council, a consultative chain supported by cryptocurrency exchanges such as Bittrex, Kraken, and OKCoin, under the head of Coinbase, It is difficult to clearly say no, and it is evaluated that there are elements that look like securities.
They stated that the evaluation they provided was not a legal opinion, but as an evaluation of how cryptocurrencies will be classified under US regulations. CrossTower, an exchange participating in the committee, stopped trading XRP on the 22nd when news related to the lawsuit was reported. However, other exchanges have yet to take action.
Some people rather enjoyed the claim that XRP is centralized.
“I rather like the fact that there are some banks that use XRP, and there are companies that are trying to increase the value of their currency.” – Brian Kelly, financial industry worker
On the other hand, Christopher Jang-Kalo, former chairman of the Commodity Futures Trading Commission (CFTC), said that XRP should be viewed as “a means of currency or exchange,” not securities.
Former Chairman Jang Kalo heard on the basis of the Howey test (a Supreme Court precedent used as a criterion for evaluating whether a product is a securities).
In short, in the escort test, if money is invested in a joint enterprise and a reasonable return can be expected from the efforts of others, it is classified as a security. Former Chairman Jang Kalo pointed out that XRP investors have not been promised to receive profits or share the profits of Ripple.
The SEC’s view is different.
“XRP has been an investment contract from the outset, so it must comply with the registration requirements of federal securities laws.” – SEC complaint
The SEC, referring to a Ripple employee in 2013, argues that the main reason for the defendant to buy XRP is because it can make a profit if the price rises.
“In the official XRP II application filed with the New York State Department of Financial Services (NYDFS) in 2016, Ripple admitted that buyers’purchase XRP for speculation’.” – SEC complaint
Information imbalance
The SEC insists on several occasions that there is a disparity in information about XRP in the complaint. The defendant was able to sell XRP to a market with little information about cryptocurrency by “creating an information gap”.
“The defendant has a significant amount of XRP and can continue to monetize XRP without reporting it to the authorities. At the same time, it uses information imbalances in the market to make profits and poses significant risk to investors.” – SEC complaint
According to the complaint, Ripple’s CTO David Schwartz said that Ripple’s “publicly declared strategy” “is to do everything possible to maximize the price of XRP while selling XRP.”
“The majority of XRP issuers are the people involved in creating Ripple, and they originally created Ripple for the purpose of distributing XRP rather than other purposes. – David Schwartz, Ripple CTO (“Cryptocurrency Personnel-1” in the complaint)
The SEC said that Ripple had once received advice from an’international law firm’ in 2012 that XRP was at risk of valuation as a security, and claimed that Ripple knew that XRP might meet the requirements to be classified as a security.
In addition, the SEC has repeatedly heard internal emails and communications between Ripple employees and board members in the complaint.
The SEC also pointed out that it is not known that Ripple’s product On-Demand Liquidity (ODL), which uses XRP, has no naturally occurring volume in the market.
“While Ripple advertises ODL as a cheaper alternative to traditional payments, one remitter said that ODL is much more expensive and he doesn’t want to use it unless Ripple provides a significant reward.” – SEC complaint
Here, the remitter seems to refer to MoneyGram. The SEC claims that most of the XRP traded on ODL between “early 2019 and July 2020” was handled through anonymous remittance providers. Ripple bought a stake in Moneygram in June 2019, and rewarded Moneygram in exchange for using XRP.
“From 2019 to June 2020, Ripple paid 2 million XRP to the remitter, and the remitter paid the XRP from Ripple and immediately sold it to the market and converted it into cash. The remittance provider announced in September 2020 that it received over $52 million in fees and incentives from Ripple.” – SEC complaint
This amount is consistent with the details in the disclosure of the public company Moneygram.
“Ripple and Garlinghouse did not disclose the details of incentives paid to remittance providers in exchange for helping to increase XRP volume.” – SEC complaint
Effect of regime change on litigation
The current SEC chairman is preparing to close his term of office, and the SEC will be included in the personnel change target for the upcoming Joe Biden administration. The exact date is not known, but Chairman J. Clayton has said he will end his term at the end of the year.
Stephanie Abakian, the SEC’s head of law enforcement, ends at the end of the year.
“Ripple, Larson, and Garlinghaus continue to sell billions of XRP to individual investors, failing to register XRP as a security, which has led potential buyers to gain access to XRP, Ripple’s business, and other critical safeguards that I haven’t received any relevant information.” – Stephanie Abakian
President-elect Joe Biden may appoint an acting representative to oversee the SEC before the new Securities and Exchange Commission is elected.
Garlinghouse previously donated to an election campaign by Biden and Vice-President Kamala Harris. In a public statement, Garlinghouse said it was waiting for the new administration to see how it would handle cryptocurrency regulations.
In an interview with CNN reporter Julia Chatterley earlier this month, Garlinghouse replied that when asked if Ripple will relocate its headquarters abroad, he believes political changes will improve the situation across the XRP community.
Garlinghouse previously hinted at the possibility that Ripple could relocate its headquarters overseas as the SEC did not provide clarity on XRP’s legal status.
· Translated by NewsPeppermint.
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