Calling XRP a security, SEC is planning to sue Ripple

The SEC is claiming that Ripple violated securities laws by selling XRP as unregistered securities, Stuart Alderoty, general counsel of Ripple, told Modern Consensus by phone today.

The Securities and Exchange Commission told the international payments firm it will file suit in federal court by Thursday, he said. The suit also names CEO Brad Garlinghouse and Chairman Chris Larsen.

The SEC has long argued that most cryptocurrencies are securities and that selling them without following the terms of the Securities and Exchange Act of 1934 violates the law. Only Bitcoin and Ether have been declared non-securities.

“The allegation will be that Ripple’s sales of XRP constituted an ‘investment contract’ under the law,” Alderoty said by phone.

The U.S. Supreme Court defined securities—investment contracts—in 1946 with the Howey test, referring to the case on which it was ruling.

That says that a transaction represents an investment contract if it meets a four-part test: 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.

Criticizing the agency for filing the suit just days before they leave office, Alderoty told Modern Consensus, “This is an assault on the entire American cryptocurrency industry and an assault on American innovation.”

This lawsuit, filed just days before Chairman Jay Clayton leaves his post, seems drastically out of step with the Trump Administration’s stated goal of nurturing and protecting American companies.

Last week, Modern Consensus wrote that it is “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?”

On their way out the door

Noting that the SEC’s chairman, Jay Clayton, and many of its leaders will be leaving this week, Alderoty said, “it’s disappointing that rather than continuing the dialogue, even though that dialogue’s been going on for some time, they decided to do this. Literally as they’re walking out the door. And leaving it to the next administration to figure out how to take this slower.”

Alderoty added that Ripple is looking forward “to engaging with the Biden administration. Even though we’ll be defending the lawsuit, we look forward to engaging with the Biden administration and pursuing opportunities to see whether there’s a rational solution that can be reached.” 

Noting that Ripple has been “engaged with the SEC for well over two and a half years,” Alderoty said, “we could have come to a sensible resolution that respected their regulatory and policy goals, which we are certainly sympathetic to, but also the innovation and the unique status of a digital asset, like XRP, which is a virtual currency. It’s not a security. 

“We were unable to bridge that gap,” he added.

“But now, since the SEC has decided to fight on this thing, we have to defend it. And if the resolution comes through a victory in court, we’ll take that. If a resolution comes through some negotiated settlement that makes sense for both sides with the body and the administration,” that would be even better,” he added.

While being sued is “never the outcome that anybody wants,” he added that it was “somewhat liberating. 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.”

Of course, a far better solution would have been for the cryptocurrency industry to “have gotten regulatory clarity through some sort of rule making or regulatory guidance,” Alderoty said.