On Tuesday, the SEC indicted fintech company Ripple [XRP] and two of its executives for creating an unregistered security, claiming that they raised over $1.3 billion by selling the crypto, XRP, without going through the appropriate processes and disclosures.
XRP is the third most-valuable cryptocurrency on the market, and debatably the most “useful” in the real economy. Ripple enables its customers to use XRP to make cross-border money transfers that take less time than traditional money transfers. Ripple has also invested in MoneyGram [$MGI], who works with XRP.
The lawsuit appears to make investors apprehensive, however. XRP, which is worth more than $20 billion, is down 12% since the SEC’s grievance was filed in the U.S. District Court in Manhattan. The case will be a critical test for cryptocurrencies. Beyond Bitcoin, thousands of new digital assets have been created since its infancy stages back in 2017, taking advantage of a legal gray area. The SEC Finally Cracks Robinhood
Under the “Howey test”, based on a 1946 Supreme Court case, an investment is a security “when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others,” per the SEC. Surprise, Surprise: Coinbase Files IPO
In its lawsuit, the SEC purports that Ripple raised money through the digital coin offering to develop its business; “Ripple used this money to fund its operations without disclosing how it was doing so, or the full extent of its payments to others to assist in its efforts to develop a ‘use’ for XRP and maintain XRP secondary trading markets.”
In an interview on Tuesday shortly after the suit was filed, Ripple General Counsel Stuart Alderoty revealed that this claim was false. “That’s one of the many statements in this complaint that we will refute in court,” he said. People who buy XRP “receive nothing from Ripple in connection with their purchase,” Alderoty said.
Ripple, he noted, is a company that does more than just use XRP. In anticipation of the SEC’s complaint, Mr. Garlinghouse earlier released comments critical of the agency. “The SEC is fundamentally wrong as a matter of law and fact,” he said in a statement. “XRP is a currency, and does not have to be registered as an investment contract.”