Published: February 25th, 2021
Ripple, the FinTech company focused on the XRP token, has set-up a new legal entity in Wyoming, a state known for its friendly embrace of the growing cryptocurrency industry.
According to records published by the Wyoming Secretary of State, a company called Ripple Markets WY LLC has been trading actively in the state since the 11th of February, 2020.
For now, Ripple’s head office address is still listed as being in San Francisco, occupying the same address as the firm's R&D division, Ripple Labs.
The potential shift to becoming a Wyoming-based company comes ahead of Ripple's legal tussle and the US Securities and Exchange Commission (SEC). The SEC is accusing Ripple of illegally raising USD 1.3 billion through unregistered securities transactions dating back to 2013.
The company denies the charges, saying that the regulator is treating XRP differently than it does Bitcoin or Ethereum. In response to the accusations, company Chairman Chris Larsen said in October that Ripple might consider a move overseas if the US doesn't move to establish a consistent national regulatory framework for cryptocurrency businesses.
Legal experts believe Ripple’s Wyoming move could help ensure it can sustain a legal base of operations no matter the outcome of the SEC trial.
As one of the state’s Special Purpose Depository Institutions (SPDIs), Ripple should find itself free to buy and sell digital assets, lend digital assets, and provide digital asset exchange services. The company says XRP would likely be considered a digital security in Wyoming, which is allowed under the state’s SPDI rules. By extension, that should mean Ripple’s On-Demand Liquidity (ODL) services would qualify as a digital asset exchange service.
Crucially, Wyoming law exempts SPDIs from federal securities registration law and lets them provide custody services for securities, digital and otherwise.
The Wyoming location will also be advantageous if Ripple loses the lawsuit. Chairman Larsen says it would still be free to partner with another chartered Wyoming SPDI in order to continue operating.
Wyoming is one of the friendliest US jurisdictions where cryptocurrencies and blockchain are concerned. In 2019 the state became the first in America to classify cryptocurrencies as legal property.
Legislation in 2020 enabled grant crypto-exchange Kraken to receive an SPDI charter and operate as a crypto bank. Wyoming awarded its second SPDI charter to Avanti Bank shortly after Kraken received its approval.
Ripple’s defence lawyers say the SEC treats XRP differently from other cryptocurrencies and waited for years to file its lawsuit against Ripple CEO Brad Garlinghouse last December.
The SEC alleges that the US Securities Act of 1993 makes Ripple’s sale of XRP an unlawful sale of securities. Garlinghouse and chairman Larsen were listed as co-defendants in the SEC suit for ‘aiding and abetting’ alleged securities violations and profiting personally to the tune of USD 600 million. The profits came from USD 1.3 billion in sales of XRP. The SEC says that under US law, those sales constituted an unregistered securities offering.
XRP is a top 10 cryptocurrency and boasts a market cap of over USD 24 billion. The SEC lawsuit has the crypto industry's full attention as it could set a legal precedent for other cryptocurrencies.
When the SEC lawsuit against Ripple was first filed, XRP’s price sank by nearly 60 per cent, and major exchanges like Coinbase opted to delist XRP rather than risk facing legal sanctions of their own.
In a pretrial conference last week, which included a nine-page joint letter submitted by the SEC and Ripple, observers were given a view into how the case might unfold.
The letter says Ripple CEO Garlinghouse described himself as being ‘very, very long on XRP’, while company executives said they were the parties most keen on the success of XRP. In the pretrial conference, the SEC said those statements proved that XRP was being offered and sold as an investment contract.
The SEC also detailed how Garlinghouse and Larsen took part in selling XRP. According to the SEC complaint, Garlinghouse began to oversee, direct, and lead Ripple’s efforts to make XRP available for purchasers to buy and sell as early as 2016, when he was still COO.
The SEC complaint said: ‘Garlinghouse and Ripple took part in these efforts because they believed that XRP’s availability on trading platforms for digital assets was vital to their ability to sell XRP at higher prices’.
Internal Ripple documents said that this would boost XRP trading volumes on digital asset trading platforms and create ‘momentum’ for XRP, the SEC alleges.
Ripple’s rebuttal is that XRP was sold as an asset, not a security. In a previous court filing, Ripple also said that XRP does not fit the legal definition of a security, meaning the SEC has no jurisdiction to regulate it as though it were.
While a settlement seems unlikely at this opening stage of the battle, the joint letter said earlier settlement discussions had taken place between Ripple management and previous SEC divisional directors who have since left the regulator.
The arrival of a new occupant in the White House may have the potential to shape how the SEC litigation transpires. The commission is currently awaiting Senate confirmation of its new head, former chairman of the Commodity Futures Trading Commission Gary Gensler. The Biden administration has nominated the MIT professor as the new chair of the SEC.
While the new administration in Washington hasn’t made clear its position on cryptocurrencies, Ripple’s Garlinghouse seems to be optimistic about prospects for a settlement. In response to the announcement about Gensler’s nomination, he tweeted that the company would work with SEC and the Biden administration to help ‘chart a path forward for blockchain and US crypto innovation.’