Ripple Inc. said it would defend itself against a lawsuit by the Securities and Exchange Commission that the company violated investor protection laws when it sold a bitcoin-like digital asset called XRP.
The lawsuit, which has not yet been filed, would be one of the SEC’s highest-profile actions against a cryptocurrency pioneer, just as the president of the regulator is leaving at the end of the Trump administration. The SEC in recent years has brought and won mostly civil lawsuits, claiming that startups violated securities laws when they raised money by selling cryptocurrencies.
However, none of these companies was as big as Ripple and XRP. Ripple was valued at $ 10 billion in the most recent round of financing in 2019, and XRP is the third largest cryptocurrency by market value.
An SEC representative was not immediately available for comment.
Ripple said the commission was informed Monday that regulators soon intend to sue the company, CEO Brad Garlinghouse and co-founder Chris Larsen in federal civil court. The company and officers say they intend to fight the claims.
“He is wrong in law and in fact,” said Mr Garlinghouse.
The lawsuit concerns whether XRP, a digital asset launched by the company in 2012, is in fact a guarantee that should have been registered with the SEC. Registration involves providing the SEC and the public with disclosures about the company’s business model, risks and financial condition. The SEC reviews disclosures and provides feedback to improve investors.
It is not known what the SEC is looking for in its lawsuit, although in similar cases it has obtained financial penalties and a requirement for digital asset sponsors to provide ongoing disclosures to investors – just like the regular disclosures offered by public companies.
XRP is similar to bitcoin and other cryptocurrencies, but also different in key ways that triggered the SEC investigation. Bitcoin was an open source software project launched by a pseudonymous creator named Satoshi Nakamoto.
XRP, originally called Ripple, was created, originally sold and supported by Ripple.
Ripple has significantly changed its relationship with XRP, turning control of its development into an open-source network of independent developers. But the company still owns about 6.4 billion XRPs directly and has another 48 billion owned in an escrow from which it periodically sells them to the public.
Distributed 45 billion XRP from the beginning. This is different from the ways bitcoin is created and distributed.
The SEC said neither bitcoin nor ether, another well-known cryptocurrency, are securities. But the agency was wary of granting other digital assets a permit to cover federal surveillance.
Mr Garlinghouse, who criticized what he said was a lack of regulatory clarity for many digital assets, asked why the commission and, in particular, the agency’s chairman, Jay Clayton, had now chosen to take a stand on XRP.
“That doesn’t make sense to me,” he said. “It’s kind of absurd.”
Mr Clayton said he was leaving the SEC by the end of the year. He has largely taken a skeptical view of cryptocurrencies, saying many seem to fall within the legal definition of a guarantee.
Write to Paul Vigna at [email protected] and Dave Michaels at [email protected]
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