This photo features an illustration of the ripple of the ‘Altcoin’ cryptocurrency arranged for a photo on April 25, 2018 in London, England.
Jack Taylor | Getty Images News | Getty Images
Ripple, the fintech company best known for cryptocurrency XRP, believes it will be sued by the Securities and Exchange Commission on allegations that it violated investor protection laws.
The SEC will file a lawsuit against Ripple, CEO Brad Garlinghouse and co-founder Chris Larsen. It is alleged that the company violated laws against the sale of unregistered securities when it was selling XRP to investors.
Garlinghouse said he expected the lawsuit to be filed before Christmas. In a statement late Monday, he said the SEC’s lawsuit was “fundamentally wrong on legal and factual grounds,” and questioned its timing.
“XRP is a currency and does not need to be registered as an investment contract,” said Garlinghouse. “In fact, the Department of Justice and the Treasury Department’s FinCEN found XRP to be a virtual currency back in 2015, and other G20 regulators did the same. No other country has classified XRP as a security.”
“The SEC has approved XRP as a currency for over eight years and we are questioning the motivation to file this lawsuit just days before the change in administration. Instead of providing a clear legal framework for crypto in the US (SEC Chairman) Jay Clayton inexplicably decided to sue Ripple – and let the next government do the real legal work. “
Clayton said last month he would step down as SEC chairman at the end of the year before his term expires in June.
The SEC was not immediately available for comment.
Why is the lawsuit important?
With a market capitalization of more than $ 20 billion, XRP is one of the most valuable cryptocurrencies in the world. Developed and distributed by the founders of Ripple in 2012, it is designed to enable fast cross-border payments.
According to Ripple, the SEC plans to argue that XRP is a security and that Ripple is violating US law by not registering the token with the SEC before listing it.
The agency has won other high profile civil lawsuits against startups Block.one and Kik who they believe have violated securities laws by raising money through a controversial donation method known as the initial coin offering.
Ripple claims that XRP – like Bitcoin – should be classified as a currency and not need to be registered as an investment contract. The company most recently had a private value of $ 10 billion and is backed by companies like Japanese financial services giant SBI Holdings, Spanish bank Santander, and leading venture capital firms like Andreessen Horowitz, Lightspeed and Peter Thiels Gründerfonds.
The “security” label is important as it could bring XRP under strict new rules and this could seriously affect Ripple. Although Ripple claims to be independent of the cryptocurrency, it owns 55 billion of the total of 100 billion existing XRP tokens. The company even generates income from the sale of some of its XRP holdings each quarter.
Ripple has threatened to relocate its headquarters outside of the US because of the problem, citing London, Switzerland, Singapore, Japan and the United Arab Emirates as potential locations.
XRP fell sharply after news of the anticipated SEC lawsuit. The cryptocurrency fell over 17% to around 46 cents on Tuesday.
Like many other digital coins, XRP has appreciated in value this year as major investors and corporations warmed to cryptocurrencies like Bitcoin. XRP is still up around 140% since the start of the year.
Bitcoin, which hit a new record high of over $ 23,000 last week, fell more than 5% to around $ 22,620 on Tuesday. Ether, the second largest cryptocurrency by market cap, fell over 7% to $ 595.
Ripple’s new audit comes a few days after the Treasury Department proposed a new Bitcoin disclosure rule that aims to close regulatory loopholes in money laundering. The rule would force crypto exchanges to take additional compliance steps when funds are sent to what are known as non-hosted wallets that are not held on an exchange or by a bank. The Treasury Department gave the public only 15 days to comment on the plan.
It arrives after another big company in the room, Coinbase, filed for an IPO. Coinbase has criticized the US proposals on certain cryptocurrency transactions, calling them an “unfortunate and disappointing departure” from earlier moves and questioning the limited time for a public response.
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