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Ripple (XRP) Fall By 24% Over Night

The Ripple logo is seen at the SIBOS banking and financial conference. Chris Helgren/Reuters The US Securities and Exchange Commission filed...

The Ripple logo is seen at the SIBOS banking and financial conference. Chris Helgren/Reuters
The US Securities and Exchange Commission filed a lawsuit against cryptocurrency platform Ripple, its CEO, and its chairman, for orchestrating securities fraud worth $1.3 billion, the agency said Tuesday.

The SEC said Ripple illegally marketed XRP, the world's third-largest cryptocurrency, to retail customers. According to the complaint, Ripple's chairman, co-founder and former CEO Christian Larsen, and the company's current CEO Bradley Garlinghouse, raised capital for the business through the sale of XRP in an unregistered securities offering. 

The SEC didn't want to foster innovation in the digital asset space, he added. "The SEC is fundamentally wrong as a matter of law and fact," Garlinghouse told CNN.  The suit revolves around XRP, launched in 2013, which Ripple calls a cryptocurrency. The SEC says XRP is an "unregistered securities offering to investors in the US and worldwide." 

"Issuers seeking the benefits of a public offering, including access to retail investors, broad distribution and a secondary trading market, must comply with the federal securities laws that require registration of offerings unless an exemption from registration applies," said Stephanie Avakian, SEC Enforcement Division director, in a statement.

Tuesday's suit amounts to one of the most significant federal actions taken to shift unlicensed cryptocurrencies under the umbrella of more traditional registered securities. As the crypto industry has exploded in the last decade, the SEC and other agencies have struggled to classify and regulate them. In a separate action, the US Treasury's Financial Crimes Enforcement Network last week proposed new disclosure rules to better keep tabs on crypto wallets.  XRP's value had fallen by about 22% by early Wednesday, having almost completely wiped out the gains of the past month that took it to two-year highs. 

The San Francisco company, along with co-founder Christian Larsen and CEO Bradley Garlinghouse, were named in the suit. The executives have personally sold about $600 million in XRP, the SEC said. Ripple violated federal securities laws by not registering XRP as a security, which would require greater disclosure, giving investors a more complete background as they value it, the SEC said.

"Here, we allege that Ripple and its executives failed over a period of years to satisfy these core investor protection provisions, and as a result, investors lacked information to which they were entitled," said Marc P. Berger, deputy director of the SEC's Enforcement Division. 

Garlinghouse late on Tuesday said the SEC hadn't given the company "clarity" on how its XPR offering is classified - currency or security.  "To be clear, this is all based on their illogical claim that XRP is, in their view, somehow the functional equivalent of a share of stock," Garlinghouse wrote on Ripple's company blog. 

Ripple had begun its campaign against the SEC suit before it was even filed. Garlinghouse had let loose on the SEC on Twitter, saying in part that its chair, Jay Clayton, was "taking notes from the Grinch this holiday season." The suit comes just weeks before Clayton is set to depart from his SEC post, as a new administration takes over Washington. Two of Ripple's lawyers on Tuesday said the SEC's suit was without merit. 

Michael Kellogg, of Kellogg, Hansen, Todd, Figel & Frederick, said in a statement: "This complaint is wrong as a matter of law. Other major branches of the U.S. Government, including the Justice Department and the Treasury Department's FinCen, have already determined that XRP is a currency. Transactions in XRP thus fall outside the scope of the federal securities laws. This is not the first time the SEC has tried to go beyond its statutory authority. The courts have corrected it before and will do so again."