Banks that use Ripple software for cross-border payments, including PNC Financial Services Group, Bank of America and Banco Santander, received some unwanted news last week when the Securities and Exchange Commission slammed Ripple with a 71-page complaint.
The complaint sheds some light on how the company raises money by selling digital chips called XRP.
According to the SEC, Ripple executives sold 14.6 billion units of XRP for more than $ 1.38 billion to finance the company’s operations and gain personal wealth without registering XRP’s offers and sales to the SEC. These actions violated several securities laws, the complaint states. The SEC is trying to permanently ban Ripple and its leaders from selling unregistered XRP, make defendants “disclose all unearned earnings” from transactions, and impose unspecified sanctions on civilian money.
What does this mean for the banks that work with the San Francisco company?
In the early days of Ripple and XRP, some banks were optimistic about both.
The capital markets division of Royal Bank of Canada, a former Ripple partner, enthusiastically supported Ripple and XRP in a 2018 report called “Image 2025”.
ATB Financial in Edmonton began piloting Ripple’s xCurrent software for cross-border payments in 2016. Tim Wan, who at the time was director of innovation at ATB with $ 43 billion in assets, saw Ripple as a software company that try to replace the current methods. of the international money movement (essentially Swift) in a more efficient and cheaper way – “which is respectable,” he said. “And I think it’s needed.”
But Wan, who is now a member of technology consulting firm Box’s digital advisory board, had reservations about XRP even then.
“She was still a huge stranger at the time,” Wan said. “I’d argue she’s still a huge stranger.”
The SEC case will affect Ripple’s relations with banks, he said.
“Banks are built on the notion of trust,” Wan said. “Banks are extremely sensitive to the perceived lack of trust for any technology platform that is used to move money.”
An ATB spokesman said the bank had not committed to Ripple since 2016.
BBVA performed a pilot similar to Ripple in 2017, but did not push it before. The bank declined to comment on the SEC’s case.
Santander, a large Spanish bank, uses Ripple’s xCurrent software for cross-border payments in 2018. The bank does not use XRP. PNC went live with xCurrent at the end of 2019. Bank of America has been working with Ripple since 2016. All three declined requests for comment. Ripple did not respond to a request for comment.
Jay Dubow, a partner at Troutman Pepper, who previously worked for the SEC, pointed out that Ripple software is separate from the company’s XRP sales.
“As long as the company has the capacity to manage the assistance software, there should be no problems, ”Dubow said.
US banks have moved away from XRP
Ripple has long urged banks to use XRP as a mechanism for moving money around the world.
Using Ripple’s xRapid software, banks could use their own local currency (say, US dollars) to buy XRP. Then they could buy the foreign currency with that XRP and use it to make the payment, instead of using a network of correspondent banks.
Euro Exim Bank, based in St Lucia and London, said last year that it intends to start using XRP for cross-border payments. The company did not respond to a request for comment.
No American bank uses XRP in this way yet, at least not publicly.
In an interview last year, Manish Kohli, global head of payments and receivables at Citi, predicted that very few banks will use cryptocurrencies like XRP in international payments because of the market risk that cryptocurrencies bear.
The SEC’s complaint appears to prove banks’ cautious stance on XRP.
According to the complaint, Ripple earned her money not by selling software, but by selling XRP.
In 2019, for example, Ripple earned $ 23 million from sales of xCurrent and xVia software, but raised $ 200 million from sales of XRP to investors.
“In other words, the vast majority of Ripple’s revenue came from its XRP sales, and Ripple relied on those sales to fund its operations,” the complaint reads.
In addition, according to the complaint, one of Ripple’s original founders, Chris Larsen, earned $ 450 million from the XRP sales he gave himself when he and his co-founders created the first $ 100 billion. From April 2017 to December 2019, Ripple CEO Brad Garlinghouse sold more than 321 million of the XRP he gave when he joined the company and grossed $ 150 million.
Ripple’s potential defense
The accusations made by the SEC have revolved around Ripple for years, in several collective actions brought by investors and in off-the-record conversations between people pursuing the business.
Ripple and Brad Garlinghouse are likely to argue in court, as they did in past public comments, that XRP is a decentralized digital currency.
In a blog posted last week, Garlinghouse argued that XRP is not a guarantee because XRP is not an “investment agreement”. XRP holders do not participate in Ripple’s profits and do not receive dividends or have voting rights or other corporate rights. Buyers do not receive anything from the purchase of XRP except the asset. In fact, the vast majority of XRP owners have no connection or relationship with Ripple. “
Brian Klein, a partner at Baker Marquart, which has previously represented cryptocurrency companies in similar cases but is not involved in the case, said the SEC’s allegations are not tested.
“There is obviously another complete side to this story that has not yet been told and deserves to be heard,” he said. “The case could pose an existential threat to Ripple because of sanctions imposed by the SEC. Unfortunately, only filing this case could permanently affect XRP. The simple accusation of the SEC could be the death blow of a cryptocurrency is very unfortunate. “
The SEC has resolved two similar cases, Klein said.
In June, the U.S. District Court for the Southern District of New York approved a settlement with messaging software company Telegram, whose unregistered supply of digital tokens called Grams violated security laws, according to the SEC. Telegram has agreed to stop selling Grams, return more than $ 1.2 billion to investors and pay a $ 18.5 million civil penalty. In May, the company closed its cryptocurrency operation.
In October, a federal district court agreed with the SEC that the 2017 unregistered offer of digital tokens called Kins in 2017 violated federal securities laws. Kik has been banned from offering unregistered chips and will pay a $ 5 million penalty.
“The SEC has been taking a lot of action against cryptocurrency companies for several years now,” Klein said. “I believe, unfortunately, that the SEC has chosen to use the application as a regulatory tool, rather than issuing clear guidance.”
He would prefer to see regulators like the SEC work with Congress to create laws to govern cryptocurrency.
“Cases can take years to work alone in court,” Klein said. “And even when the SEC notices win, as happened with Telegram and Kik, district court decisions are not binding on other circuits or even other courts in the same circuit. What you have is a process of reading tea leaves instead of clear guidance. “