Last night the Wall Street Journal (WSJ) reported that Ripple is expecting to be sued by the Securities and Exchange Commission (SEC). CEO Brad Garlinghouse said that yesterday the SEC had informed the firm of plans to launch litigation. The heart of the lawsuit will relate to XRP and the fact that it was never registered as a security.
“They’re wrong in matter of law and fact,” Garlinghouse told the WSJ. Ripple has published a document stating why they believe this is so.
On Twitter, Garlinghouse stated, “Today, the SEC voted to attack crypto. 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.”
He continued: “The SEC – out of step with other G20 countries & the rest of the U.S. govt – 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.”
Last week we suggested something was afoot with the SEC given Ripple‘s recent actions, including the appointment of former JP Morgan Chief of Regulatory Affairs, Sandie O’Connor. The other indicators were repeated threats by Ripple that it would consider moving the jurisdiction of its headquarters, public requests for U.S. regulatory clarity, and the creation of the more independent XRP Ledger Foundation to support the ledger’s functions.
Bitcoin was deemed not to be a security because it is decentralized and at some point, Ethereum gained the same classification. Whether Ethereum was a security when its token was issued seems to have been brushed under the carpet.
While the SEC has taken action against others for their failure to register tokens as a security, the only other significant ones were the blocking of the Telegram token and a settlement made with EOS. Last October Block.one agreed to pay the SEC $24 million relating to the $4 billion EOS ICO in which Block.one did not admit or deny any infractions.
We’d speculate that Ripple does not have the same options available. Ripple is already the subject of a class-action suit with investors claiming a failure to register the token as a security. So if it settles with the SEC, it might be interpreted as an admission for that litigation, potentially opening Ripple to crippling expense.
But apart from that, compared to other ledgers, XRP has been far more centralized until recently. While there are 145 validator nodes, only a subset is on the Unique Node List (UNL), a trusted set of nodes that was dominated by Ripple in the past. Maintenance of the UNL is one of the tasks that the XRP Ledger Foundation took on just three months ago. That’s apart from the fact that Ripple sits on a massive stash of XRP tokens. Another marker in the debate is the existence of a ‘balance freeze‘ feature (credit to Tim Swanson for highlighting).
Ripple was previously involved in major litigation with R3, which was settled out of court. Because R3 has not raised any venture capital since, its likely that the settlement was for several hundred million dollars or more.
Update: Links were added to Ripple’s document arguing why they believe XRP is not a security, and the ‘balance freeze’ feature.