The Securities and Exchange Commission has filed suit against Ripple, accusing it of raising $1.3 billion through what it called an “unregistered, ongoing digital asset securities offering” of XRP tokens.
The SEC is also suing Ripple CEO Brad Garlinghouse and Chairman Christian Larsen, saying they personally sold a combined $600 million worth of XRP.
Rather than the accommodating tone most companies take when sued by the SEC, Ripple, Garlinghouse, and Larsen have come out swinging, accusing the agency of trying to pick winners, legislating by litigation, and promising to fight the charges vigorously on behalf of both themselves and the larger cryptocurrency industry.
Fighting words
“Today, the SEC voted to attack crypto,” Garlinghouse wrote on a Dec. 21 Twitter thread, when the company announced that the SEC had told Ripple it was planning to file the suit.
Accusing the agency of being “out of step” with the G20 and even other parts of the U.S. government, Garlinghouse argued that the SEC “should not be able to cherry-pick what innovation looks like (especially when their decision directly benefits China). Make no mistake, we are ready to fight and win – this battle is just beginning.”
In a Dec. 22 release, Stephanie Avakian, director of the SEC’s Enforcement Division, said Ripple and its executives “violated the registration provisions of the federal securities laws.”
She added: “We allege that Ripple, Larsen, and 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.”
Speaking to Modern Consensus by phone on Dec. 21, Ripple General Counsel Stuart Alderoty condemned the SEC’s lawsuit. He said:
“This is certainly a direct assault on Ripple, but I think it’s so much more than that. I think it’s an assault on an entire American crypto industry and American innovation… we’re fighting not only for our interests, that we’re fighting for all American innovation, when it comes to crypto and digital assets.”
Garlinghouse said much the same thing. He also tweeted that “Jay Clayton is taking notes from the Grinch this holiday season, leaving the actual legal work to the next Administration…”
Jay Clayton’s legacy
Both Garlinghouse and Alderoty had especially harsh words for departing SEC Chairman Jay Clayton.
“Chairman Jay Clayton – in his final act – is picking winners and trying to limit U.S. innovation in the crypto industry to BTC and ETH,” Garlinghouse tweeted on Dec. 21.
“I think the legacy that this lame-duck administration is trying to paint is one of the being pro-digital and pro-innovation,” Alderoty told Modern Consensus. “I think that the reality is actually quite different. They’ve been anything but pro-innovation when it comes to digital assets.”
He’s not alone in that sentiment. Mati Greenspan, CEO of Quantum Economics said in a post:
“We certainly thought that we’d heard the last of U.S. Securities and Exchange Commission Chairman Jay Clayton, but it seems he’s landed us one final blow before departing from his role at the SEC’s top post.”
Calling the agency’s timing “more than a bit strange,” he noted that the case will actually be overseen by “the new SEC, whose key officers will be appointed by Pappa Biden,” referring to President-Elect Joe Biden.
From Clayton’s point of view, Greenspan said, “he’s getting one last thing off his to-do list, something he probably should’ve done a long time ago.”
Solidarity and brickbats
Ryan Selkis, CEO of crypto intelligence firm Messari, tweeted out support for Ripple—a company he has trashed in the past—after it revealed the SEC lawsuit was forthcoming.
Noting that many of the cryptocurrency industry’s most influential people and companies keep a “Swiss neutrality stance on assets,” Selkis said, “We’re ‘in this together’ to draw lines of regulatory demarcation. XRP as a ‘security’ further hurts the U.S. businesses while global comp[anies] will continue to make these markets. XRP as a security also means other assets will meet the same fate.”
He added: “At least Ripple has $ to fight.”
Garlinghouse thanked Selkis for pointing out what the lawsuit “could mean for the larger U.S. crypto industry.” He said:
“The SEC is doing the opposite of ‘fostering innovation’ here in the U.S. It’s not just XRP they’re attacking here.”
Not everyone in the industry supports Ripple, however.
Jerry Britto, executive director of crypto think tank Coin Center tweeted out links to two posts in which the organization argued that Bitcoin and Ethereum are not securities. He pointedly added:
“You won’t find a similar post for Ripple. We have nothing to say about it.”
XRP’s Insecurity
At issue in the SEC’s case is whether or not XRP is a security, also known as an investment contract.
For the sale of XRP and other cryptocurrencies to be considered a security, they would have to meet the four-part Howey test, created by the U.S. Supreme Court in 1947. That says that a transaction represents an investment contract if a person (1) invests money (2) in a common enterprise (3) and is led to expect profits (4) solely from the efforts of the promoter or a third party.
XRP is so closely associated with Ripple—which owns 45 billion of 100 billion XRP in existence—that the token is often referred to as “ripple”—which the company objects to strenuously.
In a Dec. 21 tweet, Alderoty pointed out that the SEC’s determination that XRP is a security is not shared by the rest of the government. In 2015, he noted, “the U.S. Government concluded XRP was a virtual currency. Last I checked the SEC is still part of the US Government. Here’s the plus side – the industry will finally get the clarity it deserves. Goodbye “Howey test,” hello “Ripple test.”
He was referring to a case in which the U.S. Department of Justice and FinCEN, “settled a case with Ripple and determined that XRP was a convertible virtual currency and Ripple was a money transmitter of XRP. The settlement required Ripple’s XRP transactions to comply with laws that do not apply to securities transactions,” Alderoty said.
He also complained strenuously that the company had been talking with the SEC for years about the issue.
“It’s really disappointing that they’re doing this,” Alderoty told Modern Consensus. “We’ve been engaged with the SEC for well over two and a half years, trying to see whether there is a path here where we could come to a sensible resolution that respected their regulatory and policy goals—which we are certainly sympathetic to—but also respected the innovation and the unique status of a digital asset like XRP, which is a virtual currency, it’s not a security. And we were unable to bridge that gap before this administration was leaving.”
Ripple CTO David Schwartz also complained that the SEC was acting in bad faith in a tweet.
While frustrating, the lawsuit is also “somewhat liberating,” Alderoty told Modern Consensus.
“The lawsuit is finally called and it’s called in a neutral forum, which is a court. The court will hear the SECs arguments and more importantly, I think the court and the world will finally hear the full arguments of Ripple.”
Choosing China
In saying the SEC’s decision to file a lawsuit “directly benefits China,” Garlinghouse was referring to a complaint Ripple and its executives have long harbored.
Noting that a majority of the mining of both bitcoin and ether takes place in China, the argument is that the government could pressure miners to take actions benefitting itself rather than the two cryptocurrencies users.
Being the only digital assets not considered securities gives the two leading cryptos a big advantage, according to Ripple. And by leaving the regulation of all other cryptocurrencies—and especially whether they are securities—vague and at the discretion of several agencies including the SEC, the administration is essentially picking winners.
Being on the losing end of that advantage is “a really frustrating place to be,” Garlinghouse told CNBC in October. “We are in a race with China,” he said, adding that “China is leaving others in the dust.”
In a Dec. 14 article about Jay Clayton’s legacy, Modern Consensus opined that the SEC chairman risked being “recalled as the man who handed America’s crypto industry over to China.”
The article called it “puzzling that time and again Chairman Clayton has seemed to place the interests of American companies at a crippling disadvantage. Why has the SEC granted its seal of approval to ether and bitcoin, both of which are dominated by Chinese miners? Why has the SEC declined to grant the same status to American developed technologies?”
Ripple and Garlinghouse’s position was backed up Director of National Intelligence John Ratcliffe in November, who wrote to Chairman Clayton about the “concerns the U.S. has about China’s sway over digital currency,” according to the Washington Examiner.
Calling it a push to get the SEC to implement rules that make it easier for other cryptocurrencies to compete, the article cited a “senior intelligence official” saying that “[t]here are serious national security concerns about China’s control over Bitcoin and Ether… the bottom line is that we cannot allow China to dominate the technologies and innovations that are going to decide who runs the world for decades to come — from artificial intelligence to digital currency, and everything in between.”
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