Dec 22, 2020 - Economy

SEC lawsuit against crypto firm Ripple could put chill on industry investment

Illustration of the shadow of a gavel hovering over the Ripple logo

Illustration: Sarah Grillo/Axios

Ripple, one of the world’s most valuable cryptocurrency companies, on Monday disclosed that the SEC plans to sue the company, its CEO and its executive chairman for allegedly selling unlicensed securities. [Update: The lawsuit was filed Tuesday afternoon]

Why it matters: This could put a chill on some crypto industry investment, as Ripple has no interest in settling fast and moving on. It also could mildly complicate the upcoming IPO for Coinbase, where XRP-to-dollar activity made up 15% of trading volume over the past 30 days (per Nomics).

The basic backstory: Ripple in 2012 conjured a cryptocurrency called XRP, and has been gradually selling it off in scheduled allotments. This differs from the “mining” process used to create more traditionally-decentralized tokens like Bitcoin and Ether.

  • XRP’s current total value is around $22 billion, with Ripple still holding the majority of it in its treasury.
  • Ripple didn't register XRP as a security before selling it to third-party investors. Instead, it’s maintained that XRP is a virtual currency, in part relying on definitions contained in a 2015 settlement with the U.S. Justice Department (whose investigation was led by Katie Haun, now a partner with early Ripple investor Andreessen Horowitz).
  • The SEC has determined that several cryptocurrencies, including Bitcoin and Ethereum, are not securities. But it's also argued that certain cryptocurrencies are securities, and that others were securities at the time of initial sale and later morphed into virtual currencies. Those falling afoul of the SEC have included Kik/Kin and Telegram.
  • In this case, the SEC believes XRP was a security both at the time of sale and today, Ripple CEO Brad Garlinghouse tells me.

Garlinghouse says that the company has been in consistent talks with the SEC for years, but that he didn't know a lawsuit was imminent until yesterday.

  • He argues that outgoing SEC commissioner Jay Clayton is "picking winners" and seeking to codify a Bitcoin/Ether duopoly. "This is what an authoritarian government like China would do."
  • He also argues that Ripple's control over XRP is overstated, saying the company recently opposed two proposed developer changes and was outvoted.
  • When I asked if he has the stomach for a prolonged legal fight with the U.S. government, he laughingly replied: "How long have you known me?"

Crypto VCs are split on the significance of this pending suit beyond Ripple and the XRP ecosystem.

  • Some say they plan to take a breather until they have a better understanding of the SEC's argument, Ripple's defense and how both could apply to other cryptocurrency upstarts. They also want to see who Joe Biden picks to succeed Jay Clayton and watch how proposed Treasury Department rule-making plays out.
  • Others believe this is an issue specific to Ripple, which has long been a crypto industry lightning rod, and that the SEC's actions have little bearing on startup activity — particularly efforts building on top of Bitcoin or Ether.

The bottom line: Jay Clayton is dropping a bomb on his way out the door, and the crypto industry will be left to assess the damage.

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