UPDATE: March 5, 2021: The Securities and Exchange Commission (SEC) can't regulate XRP because it is a medium of exchange, not a security, Ripple said in a filing Thursday with the U.S. District Court for the Southern District of New York, according to Bloomberg.
"The SEC's filing, based on an overreaching legal theory, amounts to picking virtual currency winners and losers as the SEC has exempted Bitcoin and Ether from similar regulation," Ripple told the court.
Ripple CEO Brad Garlinghouse and co-founder Chris Larsen intend to file a motion to dismiss the regulator's complaint against the blockchain payments company, attorneys for the executives told the court Wednesday.
The Securities and Exchange Commission (SEC) sued blockchain payments company Ripple, as well as its CEO, Brad Garlinghouse, and co-founder Chris Larsen, on Tuesday for allegedly violating investor-protection laws by selling nearly $1.4 billion in unlicensed securities, according to The Wall Street Journal and Fortune.
Garlinghouse and Larsen "created an information vacuum" that allowed them to sell XRP into a market that only had information they chose to share, the agency said in its suit.
- "The SEC is fundamentally wrong as a matter of law and fact," Ripple said in a statement to Reuters. "XRP is a currency, and does not have to be registered as an investment contract."
The lawsuit hinges on whether XRP — the digital asset the company's founders developed in 2012 — is a security, which must be registered with the SEC, Garlinghouse said.
The CEO said Monday the regulator had " inexplicably decided to sue Ripple” even though the SEC “has permitted XRP to function as a currency for over eight years.”
"It's not just Grinch-worthy, it's shocking," Garlinghouse told Fortune. "It's an attack on the entire crypto industry and American innovation."
Garlinghouse said Ripple would challenge the suit in court “to get clear rules of the road for the entire industry in the U.S.”
The CEO also blasted the regulator for its timing — suing just as agency Chairman Jay Clayton and other senior officials are set to depart to make way for the new administration.
"Clayton did this with one foot out the door. Rather shamefully, he has decided to sue Ripple, and leave the legal work to the next chairman," Garlinghouse said.
The SEC said Garlinghouse and Larsen ignored legal advice that the coin could be considered an investment contract and therefore was a security. Garlinghouse personally profited by selling $150 million worth of XRP, the suit said, according to The Wall Street Journal; Larsen, by three times that much.
“From a financial perspective, the strategy worked,” the SEC said, according to Bloomberg. “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.”
The suit put XRP in a value spiral. The coin lost 60% of its worth over the next week, Bloomberg reported, as Coinbase and other exchanges delisted it. Coinbase said it would fully suspend trading XRP on Jan. 19 but would continue to provide custodial services for clients.
Jake Chervinsky, general counsel at Compound Labs, characterized the suit as the SEC "playing hardball."
"XRP is basically useless if deemed a security. Alleging violations through present day is a kill shot. Charging individual executives is remarkable," he wrote on Twitter.
In a statement on its website, Ripple accused the SEC of introducing "more uncertainty into the market, actively harming the community they’re supposed to protect.”
“It’s no surprise that some market participants are reacting conservatively as a result," the company said. "We’ll be filing our response in a few weeks to address these unproven allegations.”
Ripple, which was founded in 2012, uses XRP to make international payments cheaper and faster. XRP is used as a bridge currency to help banks and financial institutions with international payments.
At a 2019 fintech conference, Garlinghouse said the company owns roughly 56% of the world's XRP.
The SEC's suit follows a proposed rule by the Treasury Department's Financial Crimes Enforcement Network (FinCEN), which would require banks and money services businesses to submit reports, keep records and verify the identity of customers in relation to transactions involving "unhosted" digital asset wallets — wallets not held by a financial institution.
The proposed rule would require banks to file a report to FinCEN for unhosted wallet transactions exceeding $10,000 in value.
Garlinghouse said the Treasury proposal and lawsuit highlight the Trump administration's hostile approach to crypto and said the incoming Biden administration may see things differently.
"I think we have to stand up for all of crypto — and not let the SEC bully the entire industry," Garlinghouse told Fortune. "We're going to be on the right side of history."
Ripple, which opened a Washington office last year, claimed at the time it was the first major blockchain company to set up a global regulatory team in the nation's capital.
"At a time when I think a lot of companies in this space are running away from D.C., we're running toward D.C.,” Garlinghouse said at the time, adding he hoped the office could help provide clarity to regulators in Washington and globally, on the various functions of digital assets.