Published: December 30th, 2020
The Securities and Exchange Commission (SEC) of the U.S. on Tuesday, December 22, filed a civil suit against Ripple Labs Inc., the Ripple payment protocol developers, and XRP that the company violated investor protection regulation.
On Tuesday, December 22, the Securities and Exchange Commission (SEC) of the U.S. sued Ripple Labs Inc. for violating investor-protection laws when it distributed its cryptocurrency, XRP.
The suit, which is one of the very prominent actions from the SEC targeting a cryptocurrency company, came just as Jay Clayton, the agency's chairman, is departing at the end of President Trump's era. Over the past few years, the agency has prosecuted and successfully won several civil suits against startups, mostly on charges of trampling securities laws when raising capital via initial coin offerings (ICO).
However, none of the SEC's previous cases has more clout than this recent Ripple case. The company was valued at about $10 billion during a recent funding round in 2019. Besides, XRP, the cryptocurrency associated with the company, is the fourth-largest crypto coin by market capitalization. Until recently, it was the third-largest coin for the better part of 2020. It only slipped a position down after the SEC-inspired woes triggered a massive selloff.
Following news of the suit, the price of XRP tanked by almost 25% on Wednesday, December 23. The coin was exchanging at about ¢35 during the morning trading session. According to data from CoinDesk, the drop came after a 17% slip from the previous day when the company divulged that it expected legal action from the SEC.
The SEC is suing the company, its CEO, Brad Garlinghouse, and Chris Larsen, the co-founder. The substance of the SEC's case is that XRP is not a cryptocurrency, rather a security with similar characteristics to shares of a company and should be treated as such. The suit alleges that Ripple conducted an unregistered securities offering and disposed of some $1.3 billion worth of XRP.
The suit alleges in part that Ripple Labs Inc., Garlinghouse, and Larsen failed to duly register the company's offer and sale of billions of XRP coins to retail investors. The plaint adds that Ripple Labs and its key executives denied potential investors of adequate disclosures about the company, its business, and other crucial long-standing protections that a robust public market system considers fundamental in failing to register.
Ripple denies these charges. In its rejoinder, the company has said that XRP is a virtual currency and should not go through the same registration processes of an investment contract. Besides, Ripple has questioned the suit's timing seeing that it has come at the same time that the SEC chairman Jay Clayton is standing down.
Ripple said the U.S. government and a bunch of its regulators had previously acknowledged XRP as a currency.
Following the slip in price, XRP has ceded its position in the valuation log to Tether (USDT), a dollar-pegged stablecoin often used by investors to trade crypto. According to CoinMarketCap data, USDT surpassed XRP on Wednesday, December 23.
The "security" label that the SEC is pushing matters to the company because it could change the outlook of XRP and expose it to strict new rules, which might heavily impact the cryptocurrency. Ripple owns 55% of the 100 billion XRP tokens in circulation. Besides, it earns by selling some of its XRP haul each quarter.
In an interview with CNBC, Garlinghouse said that there is confusion because of the outlook. Ripple is a company with shareholders. The company raised capital from venture capitalists and financial institutions while and XRP is a different thing altogether, Garlinghouse added.
He said that for the SEC to come out now with this suit is incredible considering that XRP trades as a currency in about a couple of exchanges worldwide, and no country has come out to treat the coin as security. The CEO said that the SEC's actions send ominous signs to innovations in the blockchain sphere.
XRP was created and distributed by Ripple Labs Inc. in 2012. The coin facilitates fast cross-border value transfers. The coin's price has risen along with that of Bitcoin and other altcoins in 2020. However, where Bitcoin has risen far above its 2017 all-time high, XRP still sits 90% below its record peak in 2017.
Ripple, the company, was last valued at $10 billion and counts on entities such as Santander Group, Strategic Business Innovator Group (SBI Holdings), Andreessen Horowitz, the Founders Fund established by Peter Thiel, and Lightspeed as shareholders.
The bulk of the SEC's complaint is based on Ripple providing asymmetric information about XRP. Ripple countered, saying that the SEC is outright wrong on the facts of the law.
The agency alleges that Ripple created an information vacuum that let the company, Garlinghouse, and Larsen market their coin to a market that had inadequate information about it. The plaint adds that Ripple continues to hold a significant amount of XRP without a formal registration statement in place.
SEC contends that Ripple can still monetize their XRP holding while relying on the information asymmetry it has created to continue gaining, a situation that creates a considerable risk to investors. In the plaint, the SEC quotes David
Schwartz, Ripple's CTO, who said that the company's strategy is to do everything in its powers to maximize the price of the coin over the duration it takes it to sell its XRP stash.
These allegations come in the backdrop of Ripple's threats. The company has threatened in the past that it might shift its headquarters out of the U.S. It has cited a lack of clarity in the regulations guiding the cryptocurrency space. Ripple options are London, Singapore, Zurich, Tokyo, and Dubai if it makes a move.
The SEC has announced its civil suit against Ripple Labs Inc. and its CEO Brad Garlinghouse, and co-founder Chris Larsen for violating investor-protector laws. The coin's price has taken a beating because of the suit. It dropped more than 60% or more than ¢50 off its ¢76 30-day high in the week that ended on Saturday, December 26.