Ripple, the fintech company best known for cryptocurrency XRP, has said it expects to be sued by the Securities and Exchange Commission over allegations that it violated investor protection laws.
The SEC is set to bring a lawsuit against Ripple, CEO Brad Garlinghouse and co-founder Chris Larsen. It will claim that the company violated laws against selling unregistered securities when it sold XRP to investors.
Garlinghouse said he expects the lawsuit to be filed before Christmas. In a statement late Monday, he said the SEC’s suit was “fundamentally wrong as a matter of law and fact” and questioned its timing.
“XRP is a currency, and does not have to be registered as an investment contract,” Garlinghouse said. “In fact, the Justice Department and the Treasury’s FinCEN already determined that XRP is a virtual currency in 2015 and other G20 regulators have done the same. No other country has classified XRP as a security.”
“The SEC has permitted XRP to function as a currency for over eight years, and we question the motivation for bringing this action just days before the 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.”
Clayton last month said he would step down as SEC chair at the end of the year, ahead of the expiration of his term in June.
The SEC wasn’t immediately available for comment.
Why does the lawsuit matter?
With a market cap of more than $20 billion, XRP is one of the world’s most valuable cryptocurrencies. It was created and distributed by the founders of Ripple in 2012, and is designed to facilitate fast cross-border payments.
According to Ripple, the SEC plans to argue XRP is a security and that Ripple violated U.S. laws by not registering the token with the SEC before listing it.
The agency has won other high-profile civil suits against start-ups Block.one and Kik, which it says violated securities laws by raising money through a controversial fundraising method known as an initial coin offering.
Ripple maintains that XRP — like bitcoin — should be classified as a currency and doesn’t have to be registered as an investment contract. 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.
The “security” label matters because it could bring XRP under strict new rules, and that could heavily impact Ripple. Though it claims to be independent of the cryptocurrency, Ripple owns 55 billion of the total 100 billion XRP tokens in existence. The company even makes revenue from selling some of its XRP holdings each quarter.
Ripple has threatened to move its headquarters outside of the U.S. over the issue, with London, Switzerland, Singapore, Japan and the United Arab Emirates tipped as potential locations.
XRP declined sharply following news of the expected SEC suit. The cryptocurrency fell over 17% Tuesday, to trade around 46 cents.
Like many other digital coins, XRP has spiked in value this year as major investors and companies have warmed to cryptocurrencies such as bitcoin. XRP is still up around 140% year-to-date.
The fresh scrutiny over Ripple comes days after the Treasury Department proposed a new bitcoin disclosure rule aimed at closing money-laundering regulatory gaps. The rule would force crypto exchanges to take extra compliance steps when sending funds to so-called unhosted wallets that are not held on an exchange or by a bank. The Treasury gave the public just 15 days to comment on the plan.
It arrives after another major company in the space, Coinbase, filed for an initial public offering. Coinbase has criticized the U.S. proposals on certain cryptocurrency transactions, calling them an “unfortunate and disappointing departure” from previous moves, and taken issue with the limited time given for a public response.