Ripple Responds to the SEC’s Enforcement Action

Matt Stankiewicz, Managing Counsel at The Volkov Law Group, joins us for updates on the SEC enforcement action against Ripple. Matt can be reached at mstankiewicz@volkovlaw.com.

Following the SEC’s December filing, Ripple Labs, Inc. has now responded and taken its first steps to defend itself against the allegations.  Ripple’s first move was to file FOIA request with the SEC to obtain the information from the Commission related to Bitcoin and Ethereum, two of the largest players in the cryptocurrency industry right now and comparable to Ripple in many regards.  This request casts a broad net and seeks a variety of internal documents and communications relating the SEC’s stance that neither appear to be securities under current interpretation.  Additionally, the request is crafty and weaves in a variety of facts about both entities in an attempt to draw parallels between the two entities and Ripple.  It was clearly intended to appeal to the broader public, as much as it was intended to produce potentially helpful information.

Specifically with Ethereum, Ripple points to various similarities between Ether and XRP.  For one, Ripple pulls the “premined” language directly from a post on the Ethereum Blog that announced the launch of Ether’s initial sale, or fundraising effort.  The SEC alluded to this same type of action from Ripple in its complaint.  Ripple’s attorneys also highlight the Ethereum Foundation – the entity that developed and continues to maintain the Ethereum Network – and Consensys – an incubator for Ethereum based projects.  The Ethereum Foundation granted itself 12 million Ether during the fundraising event, and Consensys currently holds an undisclosed amount.  Ripple’s request highlights a very interesting comment William Hinman, the SEC’s Director of the Division of Corporation Finance, where he discussed Ether’s status.  At that time he suggested that Ether would not be treated like a security, but arrived at that decision by “putting aside” the Ethereum Network’s initial fundraising efforts. 

Ripple references a variety of communications sent to the SEC, including one where John Ratcliffe, Director of National Intelligence, requested information relating to China’s “control” over digital currency – specifically, Bitcoin and Ether – due to their majority in mining power.  Other National Security officials have requested information from the SEC related to digital currency for its impact on U.S. national security interests. 

A few days later, Ripple filed its Answer to the SEC’s complaint.  Ripple concurrently sent a letter to its employees summarizing its actions and its response.  In this letter, Ripple provided a summary of its Answer and the company’s determination that there was no investment contract inherent in its XRP issuance:

  1. XRP is a virtual currency and thus, outside the SEC’s jurisdiction.
  2. Ripple has never entered a contract for an investment with any holders of XRP.
  3. Ripple never held an ICO, never offered future tokens to raise money and has no relationship with the vast majority of XRP holders.
  4. Holding XRP does not mean a person receives a portion of Ripple’s revenue or profits.
  5. Ripple’s XRP sales amounted to far less than 1% of the massive XRP market that has grown over the last 8 years.
  6. The XRP Ledger, on which XRP actually moves, is completely decentralized. The SEC ignores the economic reality of an XRP transaction.
  7. Ripple’s XRP holdings do not create an investment contract any more than DeBeers holdings convert diamonds into securities. 

The SEC’s action has caused a massive impact to the value of XRP.  The price has plummeted since the SEC filed its complaint and Ripple notes that it has lost almost half its market value.  Ripple notes that these damages are borne by investors in the currency that have no relation to the SEC’s allegations.  This is one of the more key arguments in support of Ripple’s stance, and is surely why they took something of a PR-focused response.

Important to note that this Answer is from Ripple itself.  Keep in mind that the SEC Complaint also names CEO Brad Garlinghouse and Chairman Christian Larsen.  Those two will likely file separate responses shortly.  We should see continued movement in the coming months for one of the industry’s defining cases.

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