Ripple Labs supports tokens representing fiat currency, commodities and other units of value such as frequent flier miles or mobile minutes using cryptocurrency known as XRP.
In December 2020, Ripple Labs and two of its executives were sued by the U.S. Securities and Exchange Commission for selling XRP tokens, which the SEC classifies as unregistered securities, and raising more than $1.3 billion.
Here are 10 things to know about the SEC lawsuit against Ripple XRP.
The Securities and Exchange Commission filed a lawsuit on Dec. 2 against Ripple Labs and two of its executives, alleging that they offered and sold more than $1.38 billion of digital asset XRP without registering as a security or getting an exemption. Ripple denied that XRP is a security or that it violated securities laws. At the heart of this case is whether or not XRP is an “investment contract” and therefore a security.
The issue is whether Ripple is a security or not. The SEC says it is. Ripple argues that it isn’t. This is the same issue that’s been central to just about every other enforcement action brought by the SEC in the digital asset space, according to JDSupra.
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The SEC says Ripple Labs executives co-founder Christian Larsen and CEO Bradley Garlinghouse ignored legal advice that the cryptocurrency could be considered an investment contract and therefore a security, Bloomberg reported. Larsen and Garlinghouse are accused of personally profiting by about $600 million.
The SEC is seeking eight years’ worth of personal financial information about Larsen and Garlinghouse, Bloomberg reported. The defendants say the request is a “wholly inappropriate overreach” in a suit that doesn’t involve alleged fraud. They say that regulators are demanding everything from the proceeds of unrelated business transactions to “how much money they spend at the grocery store every week.” However, there is no allegation that their finances were intermingled with those of Ripple.
Ripple operates a network that allows cross-border payments using its cryptocurrency XRP to transfer money over the XRP network. The SEC has acknowledged that Bitcoin or Ether are not securities, in that they are minted through the mining process. However, XRP’s supply was capped at 100 billion XRP when it was created in 2012. Of that 100 billion XRP, 20 billion belongs to Ripple’s three co-founders and the other 80 billion is in reserve for future issuances.
Numerous cryptocurrency exchanges such as Coinbase and Kraken have delisted XRP or restricted its use to non- U.S. customers, LedgerInsights reported. Money transfer company MoneyGram said it would stop using Ripple’s platform after the SEC’s lawsuit against Ripple alleged that XRP is a security. Initially, MoneyGram said it would take a wait-and-see approach but continue to use the platform. So it seems to have changed its tune.
MoneyGram says it’s looking for more regulatory clarity in the U.S. for the use of digital assets and blockchain technology when this lawsuit is conlcuded.
For the past several years, crypto network developers have faced a regulatory Catch-22. Distributing tokens to people may violate securities laws if the network isn’t functional or decentralized. But it can’t mature into a functional, decentralized network free from dependence on the managerial and entrepreneurial efforts of a single group unless the tokens are distributed to potential users and and freely transferable among them and developers on the network, JDSupra reported. This is where the Ripple case can provide much-needed clarity.
When the lawsuit was announced, the value of a ripple coin fell sharply, and has remained highly volatile. However, its market cap has almost doubled since the beginning of the year, according to CoinMarketCap.com.
Because currencies and securities are two different things, the SEC argument that Ripple is a security may be losing its credibility with the judge, according to attorney Jeremy Hogan, who is not involved in the case, Finance Feeds reported.
In the most recent court session of the SEC vs Ripple, the judge “dropped a bombshell” when she interrupted Garlinghouse lawyer Matthew Solomon.
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The judge said, “My understanding about XRP is that not only does it have a currency value but it has a utility and that utility distinguishes it from Bitcoin and Ether.” That’s the point Ripple has been making the whole time, FinanceFeed reported.
Judge Sarah Netburn of the Southern District Court in New York apparently suggested the XRP cryptocurrency is more like a currency than a security, according to Hogan, CoinDesk reported. The judge offering the view that XRP has utility is “exactly what Ripple wants the court to be thinking,” Hogan said. “If I’m Ripple, I’m feeling pretty good.”