The US Securities and Exchange Commission (SEC) has filed a lawsuit against Ripple, the company behind one of the world’s largest cryptocurrencies, XRP.
The regulator is targeting the company, as well as CEO Brad Garlinghouse and President Chris Larsen, in the belief that Ripple violated federal securities law through the sale of XRP to individual investors.
The case hinges on the classification of XRP as a security (i.e. a financial asset from which the investor intends to profit), as opposed to a currency or medium of exchange. By failing to file a securities registration statement or seek special exemption, Ripple violated multiple sections of the Securities Act of 1933, the official complaint contends.
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“Over a years-long unregistered offering of securities, Ripple was able to raise at least $1.38 billion by selling XRP without providing the type of financial and managerial information typically provided in registration statements and subsequent periodic and current filings,” wrote the SEC.
The watchdog also accused the company of using funds generated by the sale of XRP to create artificial use cases that could be used to justify its classification as a currency, instead of a security.
“Ripple used this money to fund its operations without disclosing how it was doing so, or the full extent of its payments to others to assist in its efforts to develop a ‘use’ for XRP and maintain XRP secondary trading markets,” the regulator added.
The company is also said to have created an “information vacuum” that allowed Garlinghouse and Larsen to become puppeteers of the market, releasing only select information to prospective investors.
The announcement sent the price of XRP tumbling to just $0.3 per unit, knocking more than a third off the cryptocurrency’s market capitalization.
Will XRP be delisted?
Although only two US cryptocurrency exchanges (CrossTower and Beaxy) have delisted XRP so far, it is feared a raft of major exchanges could soon follow, making the cryptocurrency effectively untradeable in the US and rendering existing XRP holdings almost worthless.
If the SEC were to succeed in its lawsuit, exchanges that continue to offer XRP to customers would have to register as securities exchanges or risk penalties.
“Many cryptocurrency exchanges would be forced to delist it, so liquidity would dry up,” explained Ryan Watkins, research analyst at Messari, who added that XRP price would “crash hard” as a result.
According to John Willock, CEO of crypto services company Tritum, “[a win for the SEC] would very likely render the asset untradeable for most exchanges and industry participants.”
It is worth noting, however, that legal proceedings will likely be drawn out and messy, meaning mass delisting is unlikely at this juncture.
Ripple, for its part, maintains that XRP should not be classified as a security. Garlinghouse himself has described the lawsuit as “an attack on the entire crypto industry and American innovation.”
In the company’s Wells Submission, a document that allows defendants to respond to any lawsuit brought against them, Ripple states that “the SEC’s theory, that XRP is an investment contract, is wrong on the facts, the law and the equities.”
“[The SEC theory] ignores the economic reality that XRP is, and has long been, a digital asset with a fully functional ecosystem and a real use case.”
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