The Securities and Exchange Commission announced December 22nd that it had filed an action against Ripple Labs Inc. and two owners and executives of the company, CEO Christian Larsen and the former CEO Bradley Garlinghouse. The complaint claims that they raised over $1.3 billion through an unregistered, ongoing digital asset securities offering.

The charges caused some sort of panic among the investors and led to a sudden drop in the price of XRP. Some exchanges in the US went so far, that they took XRP temporarily off their lists. European companies have mainly decided to keep XRP in their selection as the allegations of SEC only deal with the XRP’s legal status in the US.

SEC’s allegation defines XRP as an investment contract

According to the SEC’s complaint Ripple Labs Inc. raised capital to finance the company’s business in an illegal manner. 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.

In SEC’s press release Director of the SEC Enforcement Division Stephanie Avakian commented the complaint: “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.” She continued by adding that Ripple, Larsen, and Garlinghouse failed to register their ongoing offer and sale of billions of XRP to retail investors.

Ripple’s response to the complaint

A bit over month after the SEC’s allegations Ripple was ready to publish a response document. Their defense was shared in the Ripple.com blog and quickly reached media and investors soaring XRP price up 80% in a couple of days.

In the response Ripple takes the opportunity to criticize the SEC for creating havoc in the market. Part of the SEC’s mission is to maintain orderly markets, but the complaint caused a 50% drop in XRP price hurting investors who have nothing to do with the charges. Ripples answer is a long legal document, so I’ll only highlight some of the main arguments of their defense.

XRP Is Not an Investment Contract

According to Ripple the only question in this case is a technical one: whether or not Ripple’s limited distributions of XRP were an investment contract. They state that XRP differs from an investment contract in multiple ways.

In the answer Ripple states the following:

1. XRP is a virtual currency and thus, outside the SEC’s jurisdiction.
2. Ripple has never entered a contract for an investment with any holders of XRP. 
3. Ripple never held an ICO, never offered future tokens to raise money and has no relationship with the vast majority of XRP holders.
4. Holding XRP does not mean a person receives a portion of Ripple’s revenue or profits.
5. Ripple’s XRP sales amounted to far less than 1% of the massive XRP market that has grown over the last 8 years. 
6. The XRP Ledger, on which XRP actually moves, is completely decentralized. The SEC ignores the economic reality of an XRP transaction. 
7. Ripple’s XRP holdings do not create an investment contract any more than DeBeer’s holdings convert diamonds into securities.  

The SEC Is Out of Step Domestically and Globally

According to Ripple’s answer the functionality and liquidity of XRP are wholly incompatible with securities regulation. Regulators in the US government determined in 2015 and 2020 that XRP is a virtual currency and have since regulated it as such. At the end of 2020 the SEC suddenly changed their stance.

Regulators in many countries have concluded XRP is a virtual currency or a crypto asset, and not a security.

One of Ripple’s counsels Andrew Ceresney from the law firm Debevoise & Plimpton gave a following statement about the accusations: “The SEC’s case is unprecedented and ill-conceived. The SEC has ignored XRP’s clear status as a virtual currency, contradicting not only the findings of other U.S. regulatory agencies, but also international regulatory regimes. Over the last eight years, the XRP market, independent of Ripple’s activities, had grown to a massive scale- trading on over 200 exchanges worldwide. The SEC is now stretching the concept of an “investment contract” beyond its breaking point. We look forward to presenting our case in Court.”

Hearing starts February 22nd

The case is still on so nobody knows how this effects Ripple and XRP in the future. The pretrial conference session is set to be held on February 22nd 2021. I’ll keep following how things develop in the legal battle between SEC and Ripple Labs Inc and make updates to this articles or sequels when new information arrives. Despite Ripples trouble with the US regulators Coinmotion will continue with XRP business as usual.

The probability of a pretrial settlement seems low. The opposing parties filed a discovery letter on Monday February 16th. In the letter they stated that they have met and conferred and, having previously discussed settlement, do not believe there is a prospect for settlement at this time.