Ripple, one of The most important companies in the cryptocurrency industry, said Monday evening that the Securities and Exchange Commission was set to file a bombshell complaint against the company for the alleged sale of unlicensed securities.
The lawsuit will also name Ripple CEO Brad Garlinghouse and co-founder Chris Larsen as defendants, according to Garlinghouse, who said Fortune the agency will submit the file in the near future.
SEC spokeswoman Judith Burns declined Fortune’s asking for comments on the trial or for confirmation that there will be one.
If the agency sues Ripple, the action will follow years of debate between the company and the agency over whether XRP, a digital currency associated with Ripple, is a security, like a stock share – which must be registered with the agency – or rather is a currency and therefore beyond the jurisdiction of the SEC. XRP is the third most valuable cryptocurrency and currently has a market cap of $ 23 billion.
Ripple’s decision to announce that she is about to be sued is unusual. Garlinghouse predicted that the incoming Biden administration may be more supportive of the cryptocurrency industry than the Trump administration has been, suggesting that Ripple’s preemptive announcement may have a political component.
Garlinghouse also lambasted the SEC’s decision to sue just before the holidays, and said Ripple will fight the case. “It’s not just Grinch-worthy, it’s shocking,” Garlinghouse said. “This is an attack on the entire US crypto industry and innovation.”
Security or not?
In recent years, the SEC has ruled that the two most valuable cryptocurrencies – Bitcoin and Ethereum – are not securities, in part on the grounds that they are decentralized with no person or company controlling them.
XRP is different from Bitcoin and Ethereum in that the latter two currencies are minted in a gradual and continuous process called mining. In contrast, Larsen and others created 100 billion units of XRP all at once in 2012 for a company called Ripple Labs. While Ripple continues to hold the lion’s share of XRP, most of its cash is held in reserve, to be sold in scheduled allocations. Garlinghouse and Larsen each also own a significant amount of XRP. This arrangement has led some observers to view XRP as closer to a company’s stock than a currency.
Ripple has aggressively rebuffed the notion that XRP is security for years. The company notes that it does not have the discretion to leverage reserve funds as it wishes, and that XRP is increasingly decentralized as banks and other traders use it as a relay currency in cross-border transactions. According to Garlinghouse, the SEC views XRP as a security controlled by Ripple is like viewing oil as a security controlled by Exxon.
Now, the issue could be resolved by a federal judge, in a case that would have implications for the burgeoning cryptocurrency industry. The SEC recently won a case involving the Kik messaging app, which issued cryptocurrency tokens to its customers. A judge in that case said the tokens in question were unlicensed securities.
The facts of the Kik case, however, are different from those involving Ripple: Kik sold its tokens directly to potential investors during the height of the 2017 crypto bubble, in defiance of an SEC directive earlier this year. -the. In contrast, Ripple began researching business ideas around XRP almost eight years ago, when the agency offered no guidance on digital tokens.
The result is that the outcome of a theoretical Ripple case is far from certain.
In the remarks to Fortune, Ripple’s CEO blasted the agency and its chairman Jay Clayton for deciding to sue at a time when Clayton and other senior SEC officials are leaving as part of the presidential transition. “Clayton did this with one foot in the door. Rather shamefully, he decided to sue Ripple and leave the legal work to the next president, ”Garlinghouse said.
Legal dust comes months after Larsen and other Ripple executives suggested the company can move its headquarters outside of the United States in response to what they say is authoritarian behavior by regulators. Garlinghouse said Monday it was “baffling” that the SEC decided to sue even as countries like Singapore, Switzerland and Japan refused to treat XRP as security.
Garlinghouse also struck a nationalist note, noting that much of Bitcoin and Ethereum is created in Communist China, while Ripple is an American company.
The SEC isn’t the only regulator attracting the ire of U.S. cryptocurrency entrepreneurs. Over the past week, the Treasury Department proposed a rule that would require banks and exchanges like Coinbase to verify the identity of so-called unhosted devices and software wallets that can transact in Bitcoin and other crypto. -coins. Critics say movement could stifle the emerging industry known as “decentralized finance” and complain that the 15-day deadline the comment period for the proposed rule – which will span the holidays – is too short.
Garlinghouse called the Treasury move and the looming SEC lawsuit as parting of Trump administration officials who are relentlessly hostile to crypto. He predicted that the industry might find more favor with the new Biden administration.
In the meantime, he says Ripple is preparing to file a lawsuit.
“I think we need to stand up for all of crypto – and not let the SEC intimidate the whole industry,” Garlinghouse said, adding, “We’re going to be on the right side of history.”