The Securities and Exchange Commission plans to sue Ripple in federal civil court for selling unregistered securities, according to a news release published online by the cryptocurrency company late Monday. Ripple defended its cryptocurrency, known as XRP, as a valid currency but then drifted into conspiracy-laden language, saying that competitor coins like bitcoin and ethereum are “Chinese-controlled.”
The SEC’s impending lawsuit reportedly revolves around the question of whether cryptocurrencies like Ripple’s XRP are primarily investment contracts that should be regulated by the federal government or primarily currencies that can escape several rules around financial disclosure to investors.
While bitcoin, the most famous blockchain-based currency, was released in a decentralized way by a pseudonymous programmer, XRP was launched in 2012 by Ripple Labs and San Francisco-based Ripple is still the largest owner of XRP. The digital asset is the third largest cryptocurrency in the world after bitcoin and ether.
Brad Garlinghouse, the CEO of Ripple, defended the company in a series of tweets late Monday arguing that the outgoing chairman of the SEC, Jay Clayton, was “picking winners and trying to limit US innovation in the crypto industry” by only supporting bitcoin and ether.
“The SEC - out of step with other G20 countries & the rest of the US govt - should not be able to cherry-pick what innovation looks like (especially when their decision directly benefits China). Make no mistake, we are ready to fight and win - this battle is just beginning,” Garlinghouse tweeted.
Garlinghouse, who previously worked as a senior vice president at Yahoo and president of mobile communications at AOL in the 2000s and early 2010s, only hinted in his tweet at something that was made much more explicit in the company’s press release—namely, that China somehow controls bitcoin and ether.
“XRP consistently ranks among the top three virtual currencies by market capitalization—alongside bitcoin and ether, the two Chinese-controlled virtual currencies that the SEC has stated are not securities,” Ripple said in a six-page defense posted online.
Ripple did not immediately respond to an emailed question early Tuesday about how bitcoin and ether might be controlled by the Chinese government. The SEC’s lawsuit has not yet been filed, though Reuters reports it could be coming as soon as this week.
The Wall Street Journal, which was the first to report the news, notes that while the SEC has gone after several digital currency peddlers in recent years, Ripple is the largest crypto company to attract unwanted attention from the feds. Ripple had a valuation of $10 billion in 2019. Ripple co-founder Chris Larsen is likely to be personally named in the lawsuit along with Garlinghouse, according to the WSJ.
Cryptocurrencies plunged overnight on the news of the impending SEC action against Ripple, with bitcoin down over 5% and ether down over 7%. XRP also plunged in price late Monday and early Tuesday. Even without the SEC action, several investors have expected bitcoin to tumble after recently reaching a record high of over $23,000.
Update, 1:25 p.m. ET: Gizmodo received two emails asking for “corrections” this afternoon from two different PR firms claiming to represent Ripple.
Isaac Sherbin from Nectar Communications and Stephanie Kwok from Brands 2 Life both claimed it was factually inaccurate to call XRP “Ripple’s cryptocurrency” because Ripple is no longer in control of the digital asset. Both PR reps admitted that Ripple did create XRP and does still own XRP (only one rep admitted it owns a majority of XRP), but are now trying to split hairs over how XRP is described.
Yes, Ripple no longer “controls” XRP, but Ripple Labs created the cryptocurrency and owns a majority of XRP currently available. Sherbin even phrased his email by stating that, “While Ripple does own some XRP...” which is pretty entertaining for how slippery it appears to be. Some? Ripple owns roughly 60%, according to Forbes.
Gizmodo responded to both emails by asking the original question we had sent Ripple this morning. What does Ripple mean when it says that bitcoin and ether are “Chinese-controlled.” We still haven’t heard back.