Cryptocurrency company Ripple prepares to be sued by the SEC

Photo (c) DaLiu - Getty Images

Ripple maintains that XRP is a currency and doesn’t have to be registered as an investment contract

The Securities and Exchange Commission (SEC) is reportedly launching a Christmastime lawsuit against Ripple Labs, alleging that the company violated laws against selling unregistered securities when it sold the cryptocurrency XRP (aka Ripple) to investors.

Ripple Labs, Inc. is a U.S.-based technology company which created the Ripple payment protocol and exchange network. The company positions itself as a do-gooder of sorts -- one that’s “helping transform how vulnerable populations, remitters and small businesses worldwide, send and receive money across borders.” It adds that it’s also “creating greater economic fairness and opportunity for all through research, education and philanthropy.”

Why this lawsuit is important

Asking why this lawsuit really matters is a fair question. The simple answer is that XRP is one of the world’s most valuable cryptocurrencies, holding a market cap of upwards of $20 billion. It’s ranked by as the third-largest cryptocurrency.

Ripple operators believe the SEC’s angle will be to argue that XRP is a security and that Ripple crossed the lane and violated U.S. laws when it listed the digital currency before it registered it with the SEC. However, it has strong objections to that position.

“Ripple maintains that XRP — like bitcoin — should be classified as a currency and doesn’t have to be registered as an investment contract,” explained CNBC’s Ryan Browne. “The company was last privately valued at $10 billion and is backed by the likes of Japanese financial services giant SBI Holdings, Spanish bank Santander, and top venture capital firms including Andreessen Horowitz, Lightspeed and Peter Thiel’s Founders Fund.”

If the SEC gets its way about the “security” label, it could force XRP to follow stricter rules. Browne says that while Ripple claims it is independent from XRP, it owns nearly half of the total 100 billion XRP tokens in existence. 

Ripple says the SEC has it all wrong 

Ripple CEO Brad Garlinghouse questioned the SEC’s timing and claimed the agency is “fundamentally wrong as a matter of law and fact.”

Garlinghouse’s biggest complaint is that the SEC has allowed XRP to function as a currency for more than eight years. He also raises the question of why this move is happening now, less than a month before a change in administration.

“Instead of providing a clear regulatory framework for crypto in the U.S., (SEC Chairman) Jay Clayton inexplicably decided to sue Ripple -- leaving the actual legal work to the next Administration,” Garlinghouse wondered. Just last month, Clayton said he would step down as SEC chair at the end 2020, six months before his term officially ended.

Clayton’s position on cryptocurrencies has been questioned before. Previously, one crypto pundit asked if the Chairman’s legacy will be allowing ether and bitcoin -- technologies Moderncensus’ Kevin Saunders claims are dominated by the Chinese -- to cement their place as the two biggest cryptocurrencies in the world.

Could your debt be reduced or forgiven? Take our financial relief quiz.