Crypto Company Ripple Faces SEC Lawsuit

Ripple, the company behind XRP (XRPUSD) – the world's third most valuable cryptocurrency – said that the Securities and Exchange Commission (SEC) plans to sue it in the coming days for selling unlicensed securities. Ripple CEO Brad Garlinghouse disclosed that the federal agency had informed the company of the lawsuit. Ripple also put out a statement late Monday claiming that the planned SEC legal action was "fundamentally wrong as a matter of law and fact" and confirming that it will fight the lawsuit. The SEC has declined comment on the suit.

Why Does the SEC Want to Sue Ripple?

Ripple's XRP has been an outlier in the cryptocurrency ecosystem for quite some time. Unlike other cryptocurrencies, it does not have a capped output and is pre-mined. Both characteristics have opened it to charges of being centralized.

According to a previous lawsuit filed against the company in 2019, 20% of the 100 billion XRP tokens mined during Ripple's founding in 2012 were awarded to its founders. Another 20% were set aside for trading in the markets, and the remaining 60% were held in escrow to be periodically released into the markets at Ripple's discretion. The suit charged Ripple with conducting an "unending ICO" (initial coin offering) as founders promoted XRP online while selling off their holdings of the cryptocurrency. XRP's holdings and the alleged actions of XRP's founders flout the Howey test used by the SEC to determine security status for investment contracts.

XRP's setup is also a contrast to Bitcoin (BTCUSD) and Ethereum (ETHUSD), the top two cryptocurrencies by market cap, which have decentralized systems of mining and distribution. In previous announcements, the SEC has said that Bitcoin and Ethereum are not securities. A Wall Street Journal story on the Ripple lawsuit states that the parent company's current holding of XRP is about 6.4 billion, and 48 billion XRP are held in escrow. Ripple open-sourced its XRP development platform in 2013. However, the Enterprise Software, which is aimed at providing services to financial institutions, is still closed to outside developers.

Ripple's Counter Argument

For its part, Ripple has stated that XRP is a "fully functional ecosystem and a real use case as a bridge currency that does not rely on Ripple's efforts for its functionality or price." CEO Garlinghouse also cited the Financial Crimes Enforcement Network's (FinCEN) 2015 settlement with Ripple in which the agency settled with the company for violating anti-money laundering (AML) and Banking Secrecy Act (BSA) laws.

The CEO took aim at departing SEC Chair Jay Clayton on Twitter, accusing him of "taking notes from the Grinch" in announcing the lawsuit during Christmas week. "Clayton did this with one foot out the door. Rather shamefully, he has decided to sue Ripple, and leave the legal work to the next chair," he told Fortune. Ripple has threatened to move its headquarters to Japan and Singapore, citing onerous regulations in the United States.

Garlinghouse has characterized the action as a broadside against the entire cryptocurrency industry. The political slant of his tweets is notable because he had earlier said that the incoming Biden administration would be friendlier to cryptocurrencies than the current one.