On Tuesday, December 22, 2020 the Securities and Exchange Commission (SEC) filed charges against Ripple, and two executives Bradley Garlinghouse (CEO) and Christian Larsen (company co-founder) for raising funds illegally by selling XRP tokens through an unregistered, ongoing digital asset securities offering. Ripple raised more than $1.3 billion USD in this way in its perpetual token offering.
The suit claims that Ripple violated securities laws by selling XRP. Unlike Bitcoin and Ethereum which mine tokens and were deemed currencies by the SEC Ripple started XRP by creating 100 billion units at once. Ripple owns 6.4 billion XRP and hold 48 billion XRP in reserve, for periodic sales as a way to generate money to fund Ripple’s ongoing business activities. Both Garlinghouse and Larsen own large amounts of XRP.
Ripple admitted to the New York State Department of Financial Services in 2016 that buyers were, “purchasing XRP for speculative purposes” basically admitting that they were operating as a security not a currency.
So the main issue the SEC has with Ripple is the way it was created and distributed. All coins initially created by Ripple weren’t based on an algorithm or mining rewards. The creators essentially sold the coins as a way to generate revenue. Thus, the stock-like issuance actions of Ripple resulted in the SEC lawsuit.
XRP will be delisted from several exchanges
Centralized exchanges like COINBASE in the USA will begin to delist XRP as they have shown in the past that they do not want to handle any cryptocurrencies deemed to be securities by the SEC. The exchanges are not security platforms and for them it is easier to delist XRP than seek regulatory approval from the SEC as a securities exchange.
XRP will see its market cap slowly decease over time
As the lawsuit continues the XRP token will be delisted and its market cap will continue to decline.
We can look to another crypto-project which has many similarities to XRP that ran afoul of the SEC and were deemed to be security token and see how the token fared over time.
SEC and Veritaseum
On August 13, 2019, in press release the SEC accused Veritaseum (VERI) token’s owner Reggie Middleton of manufacturing a fraudulent scheme to sell digital securities. In the statement, the main area of fraud was Middleton violating anti-fraud provisions of US Federal Security Laws by selling illegally to retail investors. The lawsuit began in 2017 and lasted for almost two years.
The All-Time High for VERI was $504.47 on Jan 8 2018. After the SEC charges were settled VERI delisted on exchanges and currently sits at $2.25 with almost no trading volume.
Figure: VERI price chart July 2017-December 2020.
Other SEC charges to crypto-projects in the last four years have ended with equally bad outcomes for the owners and token holders. For example:
- AriseBank was fined 600 million by the SEC for offering and selling unregistered investments in AriseCoin by depicting AriseBank as a first-of-its-kind decentralized bank. Arisebank is now defunct.
- TokenLot LLC, an ‘ICO Superstore,’ for operating as unregistered broker-dealers. (no longer in operation as crypto-brokers)
- 1pool Ltd. (1Broker) solicited investors from the United States and around the world to buy and sell security-based swaps were charged and fined by the SEC in September 2018. and are now defunct.
- PlexCoins ICO halted (now defunct)
- Munchee token (now defunct)
- REcoin (now defunct)
- Airfox (now defunct)
- Paragon coin (now defunct)
- Decentralized Autonomous Organization (“DAO”) (now defunct)
- Tomahawkcoin which was a cryptocurrency hedge fund. (now defunct)
Whether the SEC charges are for selling unregistered investments during an ICO, after an ICO, or acting as unregistered brokers the long-term outcomes usually are not favorable for the project investors.
Conclusion
After the SEC charges the value of XRP saw it drop 25% in value with investors divided in to two camps either dumping XRP and exiting or adding/hodling seeing the reaction to the SEC action as a buying “dip”.
Right after VERI was charged many long-term holders backed Middleton and the project similar to the sentiment echoed by long term XRP hodlers. A year and a half after the SEC charges VERI is all but a dead project.
Will XRP be the one project to survive and overcome the SEC charges where other projects have failed? I guess it depends on whether you think Ripple and XRP can survive and are resilient enough post-SEC lawsuit.
Disclaimer: the author owns no XRP tokens.
References
SEC charges Ripple executives
https://www.cnbc.com/2020/12/22/sec-charges-cryptocurrency-firm-ripple-2-executives.html
SEC charges Veritaseum
https://medium.com/crypto-caselaw-minute/crypto-caselaw-minute-50-8-23-2019-65b576c46cd3
1pool
https://www.marketscreener.com/news/latest/SEC-Charges-Bitcoin-Funded-Securities-Dealer-and-CEO--27333261/
Arisecoin
https://www.housingwire.com/articles/42406-sec-halts-600-million-alleged-cryptocurrency-scam-that-aimed-to-revolutionize-banking/
Munchee token
https://news.law.fordham.edu/jcfl/2019/01/25/cryptocurrency-ico-issuers-on-notice-after-sec-seminal-dao-report/
PlexcCoin
https://slate.com/technology/2017/12/the-sec-is-cracking-down-on-scam-cryptocurrencies.html
Decentralized Autonomous Organization (“DAO”)
https://news.law.fordham.edu/jcfl/2019/01/25/cryptocurrency-ico-issuers-on-notice-after-sec-seminal-dao-report/
REcoin
https://www.californiarealestatefraudreport.com/archives/6626
Tomahawk coin
https://www.financemagnates.com/cryptocurrency/icos/sec-halts-tomahawkcoins-ico-on-fraud-allegations/
Tokenlot
https://sg.finance.yahoo.com/news/sec-hits-two-cryptocurrency-firms-133158156.html
Airfox and Paragon coin ICOs
https://www.cncryptonews.com/sec-settles-securities-registration-charges-against-2-ico-startups/
