The Securities and Exchanges Commission (SEC) apparently thinks the third biggest crypto is a security with plans to sue Ripple Incorporated, it’s co-founder Chris Larse and the Chief Executive Brad Garlinghouse.
The latter went to Fortune, telling them SEC plans to file a lawsuit in the near future over the alleged sale of unlicensed securities.
SEC has not yet responded to a request for comments, with the agency previously determining both bitcoin and ethereum are not securities. Instead fall within the jurisdiction of the Commodities Futures Trading Commission (CFTC).
No such determination has been made in regards to XRP, but Garlinghouse’s revelation of a planned lawsuit suggests SEC thinks it’s a security, with Ripple disputing it.
The latter is valued at $10 billion for the company itself, thus any lawsuit may be appealed all the way to the Supreme Court.
“Today, the SEC voted to attack crypto. Chairman Jay Clayton – in his final act – is picking winners and trying to limit US innovation in the crypto industry to BTC and ETH,” Garlinghouse publicly said.
He then went on to bizarrely suggest SEC’s decision “directly benefits China,” presumably because many miners are based there. Something that has no bearing on the protocol or decentralization as the 2016-17 bitcoin block wars showed.
For Ripple however a recent academic paper found XRP can’t reach consensus even under its own assumptions.
Meaning this is a centralized coin at the technical level because someone has to determine what is the Unique Node List (UNL), a list that Ripple puts up as recommendation for new nodes to follow.
As such it isn’t clear whether XRP can exist without an authority like Ripple to suggest what Unique Node List should be followed as even if few don’t follow the same UNL, the network can irreconcilably break down through simple attacks according to the paper.
For ethereum there is no such regulatory bottleneck as if SEC (or anyone else) asks the Ethereum Foundation to do something and it does do something, no one cares because all can see the code and can decide what code to run without breaking consensus within their chosen code network.
Bitcoin is even more decentralized because no one even knows who coded it, with ethereum in addition launching in a centralized manner as far as SEC is concerned as it was through an ICO on bitcoin in 2014.
However by the time SEC got to look at it, eth had become fully decentralized. Thus SEC’s Director of Corporate Finance William Hinman said in 2018:
“When the efforts of a third party are no longer key in determining the enterprise’s success, material information asymmetry recedes…
As the network becomes more truly decentralized, the ability even to identify a promoter, or someone that could make the requisite disclosures, becomes in many cases difficult or perhaps much less meaningful…
Putting aside the fundraising that accompanied the creation of ether, based on my understanding of the present state of ether, the ethereum network, its decentralized structure, we believe current offers and sales of ether are not securities transaction.”
For XRP, the promoter is obviously Ripple Labs which partners with all sorts of banks and which invited Bill Clinton to a conference for presumably primarily marketing effects.
As Ripple Incorporated holds about 50 billion XRP, or some 50% of the total supply, they obviously have an interest in promoting XRP and maybe even aggressively with Geoff Golberg, an independent researcher focusing mainly on Twitter manipulation, suggesting there was a massive XRP shill army.
The significant holdings naturally can have an effect on XRP’s price, and more importantly, the XRP holders do not get prior notice when Ripple sells.
Such XRP holders have no say over this $2.5 billion, with Ripple Incorporated having its own traditional shareholders, like VCs.
A court decision however would affect an entire category of potential crypto initiation methods because of how this company came about.
It basically just gave away freely some 50,000 XRP to anyone who had a BitcoinTalk account, with that giveaway roughly amounting to 25%.
If it was 100%, then there would be far less basis to find this a security, or maybe even 75%, but they still hold 50% of the total supply eight years after it launched.
So the bigger question here may be not whether this is a security or otherwise, but what would a reasonable person want as an outcome of a security designation.
Presumably not the return of fiat as how on earth would you even do that. SEC would obviously want a penalty cut to beef up their meager gov granted budget of $250 million a year. While XRP holders would probably like to know before Ripple sells whether it is going to sell and how much and what for.
In addition, they would want to know what they are going to spend these funds on, as well as maybe have a say on what they should spend the funds on.
So a security designation wouldn’t be a terrible outcome, except for perhaps the Ripple shareholders who probably mainly value the company based on its holdings.
For XRP holders, the market thinks it is bad news as XRP’s price has fallen about 40% since November, but if a security designation means the XRP holders become shareholders of this 50 billion XRP – currently worth more than $20 billion – then such XRP holders have kind of just doubled their money.
The downside would be that as a security there are regulations regarding where this can be traded, but the upside would be that Ripple would be under scrutiny, with insider selling laws and all the rest.
So it may be difficult for Ripple to win this case because of its huge holdings and because of the billions it has already sold and kept selling despite XRP holders revolting last year, until it got too much with the company briefly pausing to only restart again their selling this year.
The court therefore would have to consider whether it is beneficial or otherwise for XRP holders to have XRP designated as a security.
If such holders were asked last year, the answer would have probably been yes to stop Ripple from selling without any accountability whatever.
That however would probably be only if XRP can continue to run, with it unclear currently what SEC wants out of the lawsuit but there’s no reason why this can’t continue as it has, just with the disclosure requirements and holders accountability.