The bigger issue behind Ripple’s battle with the SEC

25 Dec, 2020
The bigger issue behind Ripple’s battle with the SEC

While Bitcoin’s bull run continues to dominate the headlines, a new wrinkle emerged this week in the crypto universe as the ongoing war of words between Ripple and the US Securities and Exchange Commission heated up.  On December 22, the SEC filed a formal complaint against Ripple Labs, Inc., and two of its leaders, claiming they ”raised over $1.3 billion through an unregistered, ongoing digital asset securities offering.”

A security?  Yes, that’s how the SEC is defining the third most popular digital currency, Ripple’s XRP.

“The complaint alleges that Ripple raised funds, beginning in 2013, through the sale of digital assets known as XRP in an unregistered securities offering to investors in the U.S. and worldwide,” the SEC stated in a press release detailing the charges.

By choosing to define XRP as a security, the alt coin would be subject to federal laws that govern offerings on the US stock exchanges.

"Issuers seeking the benefits of a public offering, including access to retail investors, broad distribution and a secondary trading market, must comply with the federal securities laws that require registration of offerings unless an exemption from registration applies," said Stephanie Avakian, Director of the SEC's Enforcement Division. "We allege that Ripple, (Christian) Larsen, and (Bradley) 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.”

News of the complaint drove the price of XRP down by more than 35% before beginning a recovery as Garlinghouse, Ripple’s current CEO, stood firm in the company’s assertion that the digital coin was not a security.

“We’ve always said that there is a lack of regulatory clarity for crypto in the US, and the SEC here in the United States has sat back and watched for years,” he wrote in a blog post. “In fact, the discussion around why XRP is a currency (and not a security) is one we have been having with the SEC for nearly three years and yet we’ve never been met with clarity.”

Garlinghouse, who favors over-communication, pointed out that the primary reason XRP was not a security is the coin is not an “investment contract”.

“XRP holders do not share in the profits of Ripple or receive dividends, nor do they have voting rights or other corporate rights,” he wrote. “Purchasers receive nothing from their purchase of XRP except the asset. In fact the vast majority of XRP holders have no connection or relationship with Ripple whatsoever.”

So why did the SEC decide to file the complaint in the final weeks of the current US administration?  While Garlinghouse alludes to political motivation for the move, no one knows for sure.  But one thing is for certain, he noted. This ongoing war of words has larger implications for the crypto market as it’s an “assault on crypto at large.”

Whether that is true remains to be seen.  Oddly enough, just one day after the SEC filed its complaint against Ripple, another US government entity, the President’s Working Group on Financial Markets, chose to issue a “Statement on Key Regulatory and Supervisory Issues Relevant to Certain Stablecoins.” While the group acknowledged the value of stablecoins and welcomed innovation in the digital currency markets,  it also left the door open when it came to defining each coin on its own merits.

“Depending on its design and other factors, a stablecoin may constitute a security, commodity, or derivative subject to the U.S. federal securities, commodity, and/or derivatives laws,” it said.

What happens to Ripple will be followed closely by all in the crypto universe as the future of digital currencies in relation to the traditional financial systems continues to evolve.  Will regulation hamper the deregulated space? That’s the bigger issue behind the Ripple fight.

“Regulators will continue to look closely at stablecoin arrangements, and look forward to future dialogue on these issues,” said outgoing US Treasury Deputy Secretary Justin Muzinich.

Let’s see what the new year brings.

Joyce Pavia Hanson