World's Third Largest Cryptocurrency Faces SEC Suit

Ripple is currently valued at about $23 billion.

On the evening of Dec. 21, Ripple, a giant in the cryptocurrency industry, said the Securities and Exchange Commission is ready to file a lawsuit against the company for selling unauthorized securities.

Ripple's CEO Brad Garlinghouse and co-founder Chris Larson are also named as defendants, and on the afternoon of Dec. 22, the SEC filed a lawsuit claiming the company and its executives sold $1.3 billion worth of unregistered securities.

Is Ripple's digital currency, Ripple Coin, issued by Ripple, a security (similar to a stock, which must be registered with the SEC) or a currency (not regulated by the agency)? Once the SEC files a lawsuit against Ripple, it will be a long drawn out debate between the two parties. Ripple is the third highest market cap cryptocurrency in the world, currently valued at about $23 billion.

Making public the news of the impending lawsuit was not an inadvertent move by Ripple. Garlinghouse expects that the incoming Biden administration is likely to be relatively lenient with the cryptocurrency industry compared to the Trump administration. That said, Ripple's decision to preempt the statement may have contained political factors.

Garlinghouse also slammed the SEC for filing a lawsuit while the holidays are near, and said Ripple will respond aggressively. "This news is not just stunning, it's downright outrageous." Greenhouse said, "It's an attack on the entire crypto industry and the American innovation process."

Is it a security?

In recent years, the U.S. Securities and Exchange Commission has ruled that the two virtual currencies with the highest market capitalizations - bitcoin and ethereum - are not securities. Part of the reason is that both virtual currencies are "decentralized" and not controlled by any person or corporation.

However, Ripple is not the same as Bitcoin or Ether. The latter two currencies are acquired through a slow and protracted process known as "mining. By contrast, in 2012, Larson and others created 10 billion Ripple coins for Ripple Labs in a single operation. Although Ripple has been holding onto most of the Ripple coins, most of its bonds are in reserve and will be sold according to a planned share. Garlinghouse and Larson also each hold significant amounts of Ripple coins. As a result, some observers believe that Ripple coins are more like company stock than currency.

For years, Ripple has been strongly refuting the notion that Ripple is a security. The company points out that Ripple cannot interfere with reserve funds at will, and that Ripple's "decentralized" nature is being strengthened as counterparties such as banks see it as a "bridge currency" in cross-border transactions. According to Garlinghouse, the SEC's treatment of Ripple as a security controlled by Ripple is as unreasonable as treating oil as a security controlled by ExxonMobil.

As it stands now, the case could be referred to a U.S. federal judge and could have some impact on the cryptocurrency industry, which is growing like wildfire. The SEC just recently won a lawsuit against the communications software Kik, an app that involved selling cryptocurrencies to its users. During the case, a judge ruled that the cryptocurrency was an unlicensed security.

However, Ripple is in a different situation than Kik: In 2017, when the cryptocurrency market was at its most inflated, Kik chose to sell cryptocurrency directly to its potential investors, a move that appears to be a defiance of an earlier directive issued by the U.S. Securities and Exchange Commission. And Ripple came up with a series of business ideas centered on Ripple almost eight years ago, at a time when the SEC had not yet issued any regulations for digital currencies.

So, in theory, the dust is far from settling on this Ripple lawsuit.

In an interview with Fortune magazine, Ripple's CEO slammed the agency and its chairman, Jay Clayton, for filing the lawsuit as senior officials like Clayton were leaving office. Garlinghouse said, "Clayton has one foot out the door of the commission. Shamefully, he made the decision to sue Ripple and then threw the legal work involved to the next chairman."

Months earlier, Larson and other Ripple executives had suggested that they might move the company's headquarters out of the United States in response to what they called "arbitrary behavior by regulators. The SEC's decision to file a lawsuit even though countries like Singapore, Switzerland and Japan explicitly reject Ripple as a security is "baffling.

The SEC isn't the only regulator to spark the ire of U.S. cryptocurrency entrepreneurs. Last week, the U.S. Treasury Department issued a rule requiring banks and exchanges like Coinbase to verify so-called non-custodial devices and digital wallets that support transactions using cryptocurrencies like bitcoin. Critics argue that the move could stifle the new industry of "decentralized finance," and that the 15-day comment period - which includes the entire holiday season - is too short.

In Garlinghouse's view, the U.S. Treasury's decision and the impending Securities and Exchange Commission lawsuit are parting threats from the Trump administration, which is deeply hostile to cryptocurrencies. He predicted that the industry may be more popular with the next Biden administration.

In the meantime, he said Ripple is preparing to file a lawsuit.

"I think it's important for us to stand up and speak out on behalf of the cryptocurrency industry - we can't let the SEC do whatever it wants." Garlinghouse added, "We will be on the right side of history."