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  • Post published:December 25, 2020
  • Post category:Cryptocurrency / Tech
  • Reading time:3 mins read
The third-largest cryptocurrency was sold all wrong

Ripple cryptocurrency, former CEO and founder Christian Larsen, and current CEO Bradley Garlinghouse sued by the US Securities and Exchange Commission. The SEC said it raised more than $1.3 billion through unlisted securities offerings.

The suit claims that Ripple violated securities laws by selling XRP, which The Wall Street Journal called “the third-largest cryptocurrency by market value,” over a seven-year period starting in 2013. According to the complaint, the “illegal securities offering” created information asymmetry, which allowed Larsen and Garlinghouse to sell XRP to investors who only knew what Larsen and Garlinghouse chose to tell them.

At the core of these demands is a basic question about XRP: is it a security or a currency? According to the SEC lawsuit, this is security, so Ripple doesn’t provide its investors with the precise information they need to assess potential risks. According to Garlinghouse, it’s a virtual currency, meaning the SEC has nothing to do with it. The SEC had previously determined that bitcoin and Ethereum were currencies. Additionally, the Justice Department treated XRP as currency in 2015, when Ripple settled a lawsuit against its business.

A Bitcoin
A Bitcoin

But XRP differs significantly from bitcoin and Ethereum. For both cryptocurrencies, new coins are created through an ongoing “mining” process. Ripple started XRP by making 100 billion units at once. Ripple owns about 6.4 billion XRP, and Garlinghouse and Larsen also own most of it. Another 48 billion XRP held in reserve for periodic sales. This difference may be the reason why the SEC claims XRP is a security, not a cryptocurrency.

I appreciate you saying what this could mean for the larger U.S. crypto industry. The SEC is doing the opposite of “fostering innovation” here in the US. It’s not just XRP they’re attacking here.

ORIGINALLY TWEETED BY BRAD GARLINGHOUSE (@BGARLINGHOUSE) ON DECEMBER 22, 2020.

The SEC has won similar suits against Block.one and Kik in the past, saying that the initial coin offering offered by this startup was actually security. But cases are different; Kik and Block.one conducted their ICO after the SEC’s 2017 directive. XRP emerged years before that directive.

The lawsuit didn’t come as a surprise; Garlinghouse announced yesterday that the company expected the suit, and Ripple has published its Wells response, a document explaining to the SEC that its actions are legal.

A key part of resolving whether XRP is a cryptocurrency or security may involve something called the Howey test, drawn up by a 1946 Supreme Court case. The ruling defines security as investing money in a company along with the expectation of profiting from others’ work. According to Ripple, XRP did not meet Howey’s test for a variety of reasons, but mainly because no one had bought XRP in hopes of profiting from Ripple.

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The SEC complaint raises this question. In 2016, Ripple admitted to the New York State Department of Financial Services that buyers were “purchasing XRP for speculative purposes.” It also quoted a hedge fund investor who owns XRP as saying in 2015 that “the increase in XRP value is heavily dependent on the success of Ripple.”