Photo illustration of the ripple cryptocurrency / Getty Images The Securities and Exchange Commission (SEC) has unveiled its complaint aga...
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| Photo illustration of the ripple cryptocurrency / Getty Images |
The current case could prove to be the agency's biggest catch yet. XRP is the third biggest cryptocurrency by market capitalization, and its parent company has inked agreements with central banks around the world to implement distributed ledger technology (DLT) to enable faster processing of transactions.
Key Takeaways
- The SEC has alleged that Ripple conducted an unlawful issuance of securities in its case against XRP.
- XRP's price crashed after the federal agency filed its case, and the crypto ecosystem is moving to withdraw support for the cryptocurrency.
What Is the SEC's Complaint?
The SEC's complaint is similar in nature to another one filed by XRP investors against Ripple last year. That complaint charged Ripple founders with "an intent to defraud and deceive" investors by holding an unregistered sale of securities. While the SEC's complaint does not explicitly mention fraud, it alleges that Chris Larsen, Ripple's co-founder, and Brad Garlinghouse, the company's CEO, personally profited to the tune of $600 million by selling their XRP stash during upswings in its prices.
"Defendants continue to hold substantial amounts of XRP and – with no registration statement in effect – can continue to monetize their XRP while using the information asymmetry they created in the market for their own gain, creating substantial risk to investors," the complaint states. Overall, Ripple raised $1.38 billion from investors and traders in cryptocurrency markets without submitting the proper documentation required for such sales, it claims.
The complaint also elucidates on the centralized process for creation and issuance of XRP. A total of 100 billion XRP were created in 2012 and divided between the company, which later created an escrow account to periodically release the currency in crypto markets to maintain its value, and its founders. Such arrangements violate the provisions set out in the "Howey Test," a 1946 Supreme Court ruling that is used by the SEC to determine if a given token is a security or not.
Ripple Effect on the Crypto Ecosystem
Given Ripple's prominent business relationships and XRP's market capitalization, the SEC's case could have far-reaching implications. A flurry of moves by players in the crypto ecosystem since last week is indicative of the case's seriousness. Luxembourg-based cryptocurrency exchange Bitstamp has discontinued trading and deposits in XRP, and other exchanges are reportedly considering similar moves.
XRP futures contracts, worth billions of dollars, have been liquidated, says Bybt. The cryptocurrency's liquidity could also be in jeopardy after market makers stopped providing support. Investors are also following suit. Bitwise Asset Management, a San-Francisco based crypto asset manager, said that the company would liquidate its XRP position, amounting to 3.8% in its Bitwise 10 Crypto Index fund.
Meanwhile, a former SEC official has also weighed in. Stanford Law faculty Joseph Grundfest is a former SEC commissioner. "… no pressing reason compels immediate enforcement action (against Ripple)," he wrote to the agency on Dec. 17, according to online publication The Block. "… simply initiating the action will impose substantial harm on innocent holders of XRP, regardless of the ultimate resolution. Upon learning of the proceedings, intermediaries will cease transacting in XRP because of the associated legal risk. The resulting reduction in liquidity will cause XRP's value to decline," Grundfest wrote.
XRP's price crashed by 51% to $0.25, as news of the SEC's case broke across crypto media. It recovered slightly to trade at $0.37 over the weekend. As of this writing, it is changing hands at $0.29.