SEC Update — Preliminary Ripple Response

Here’s the note I sent to Ripple employees today regarding Ripple’s preliminary legal response to the SEC’s complaint.

Hi Ripple team,

Since the SEC filed its complaint at the end of December, its side of the story has been the only one shared publicly. Our initial response was finally filed today. The “Answer” is a legal document (filed publicly) which, as the name suggests, is our official answer to the allegations in the SEC’s complaint. Although it does not fully outline our strategy (more to come as it plays out in court) it’s our first opportunity to start to set the record straight.

Although the legal process is slow, we are working to get this resolved as quickly as possible to bring clarity to the broader market. Moving quickly is important because, as you know, since the SEC filed its complaint, XRP lost almost half of its market value, causing retail holders of XRP with no connection to Ripple– the very people the SEC purports to protect – to suffer billions of dollars in losses. What’s more, part of the SEC’s mission is to maintain orderly markets… and yet their overreach created havoc in the market.

The “Answer” is a long legal document, but I’ll summarize the main points below. It looks similar to the summary of our Wells Submission, which some of you have probably read. 

XRP Is Not an Investment Contract

The only question in this case is a technical one: whether or not Ripple’s limited distributions of XRP were an investment contract. To be clear, there are no allegations of fraud, misrepresentation, etc. While we’ve seen some Twitter commentators suggest this is a non-fraud/fraud case, a first year law student can tell you that there is no such thing. It’s misleading and irresponsible (not to mention silly) to even suggest otherwise. Turning to what matters…. 

In our “Answer,” we explain why there is no “investment contract” :

  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 Is Out of Step Domestically and Globally

Before this case, no securities regulator in the world has claimed that transactions in XRP must also be registered as securities, and correctly so. The functionality and liquidity of XRP are wholly incompatible with securities regulation. Requiring XRP’s registration as a security would impair its main utility.

In fact, regulators in the US government (the Department of Justice and FinCEN) determined in 2015 and 2020 that XRP is a virtual currency and have since regulated it as such. Basically, on its way out, the Trump administration sought to undo the determination that XRP was a virtual currency made during the Obama administration.

Globally, the same is true of regulators – the UK’s Financial Conduct Authority, and regulators in Singapore and Japan have concluded XRP is a virtual currency or a crypto asset, and not a security. With its complaint, the SEC is asking the Court to contradict the findings of the agency’s peers in the US and worldwide. 

The SEC Is Picking Winners and Losers

Although XRP is the most efficient digital asset for global payments benefiting consumers around the world (and is the most environmentally sustainable crypto), there is no principled distinction between XRP’s current function and that of BTC or ETH. How does the SEC explain telling the public that BTC and ETH are not securities, then turning around and alleging the opposite is true for XRP?

What’s particularly interesting here is that at one point, the SEC claimed that ETH might have been born a security, but eventually evolved into a non-security, offering no guidance or framework for this determination. We’re just asking for the rules to be stated clearly and for those rules to be applied consistently across the board. We sent a FOIA request to the SEC asking for more information about how the determination was made, in hopes of gaining more clarity on how they came to the initial conclusion about ETH.

Furthermore, XRP is a great deal more environmentally friendly than BTC and ETH, considering it avoids the mining process. The power needed to mine and validate BTC transactions leaves an enormous carbon footprint, compared to the modest amount of energy consumed by XRP transactions. That must matter from a policy perspective. 

The SEC Has Distorted the Facts

The complaint filed by the SEC is full of cherry-picked quotes taken out of context, and draws conclusions that are unsupported by both the facts and the law. Through our response we start to clarify the record. While we can’t get into all of the specifics in this format (that will happen as the case progresses), you’ll see we denied many of the SEC’s  allegations. In time you will see why.

I’ll share a quote from one of our outside counsel with his evaluation of the case – I think summarizes the situation quite well:

“The SEC’s case is unprecedented and ill-conceived. The SEC has ignored XRP’s clear status as a virtual currency, contradicting not only the findings of other U.S. regulatory agencies, but also international regulatory regimes. Over the last eight years, the XRP market, independent of Ripple’s activities, had grown to a massive scale- trading on over 200 exchanges worldwide. The SEC is now stretching the concept of an “investment contract” beyond its breaking point. We look forward to presenting our case in Court.” Andrew Ceresney, Debevoise & Plimpton

I want to thank Team Legal for all of their hard work on this – and, on behalf of Brad, recognize the broader Ripple team for staying focused on executing against our vision while we take this case to the courts.