Ripple returns fire in SEC prosecution
The Complaint filed by the SEC advances an unprecedented and ill-conceived legal theory - with neither statutory mandate nor congressional authorization - that Ripple's distributions of the virtual currency XRP constitute "investment contract[s]" and thus "securit[ies]" subject to registration under Section 5 of the Securities Act of 1993.
Ripple's argument includes that:
XRP has different functions to a security: Specifically that XRP has features and functions that are different to those of a typical security, for example, it operates as a store of value and medium of exchange rather than in a way similar to a share in the companies' profits. Ripple Labs draws this distinction noting that the value of XRP is not determined by Ripple Labs' activities but rather is valued in tandem with trading of other virtual currencies such as Bitcoin and Ether which the SEC seems to recognise are not investment contracts.
Regulation as a security would hinder XRP's use: International regulators have not treated XRP or other digital currencies as a security. Ripple Labs states this is appropriate to ensure XRP's function as a payment mechanism is not impaired. Additionally, Ripple Labs states that it is important that other digital currencies or market makers are not unduly hampered by regulations that may not be fit for purpose.
Too little too late? Ripple Labs drew attention to the timeline of XRP's availability and stated that to regulate it as a security now was inconsistent with their approach over the past eight years. Specifically, Ripple mentioned that:
The SEC filed this Complaint 8 years after XRP was created, 5 years after the DOJ and FinCEN characterized XRP as a virtual currency and after more than 2 1/2 years of investigation during which the SEC allowed Defendants to continue to distribute XRP, allowed the XRP open market to grow, and allowed millions of market participants to rely on the free and efficient functioning of that market.
Ripple Labs re-iterates the importance of internationally consistent regulation for the digital currency market to thrive given its cross jurisdictional nature. Additionally, Ripple Labs points to the harm the SEC's actions to date have caused to XRP holders (via the price of XRP tanking) estimated at around "[USD$]15 billion in damage".
As the lawsuit continues, and investors continue to feel the ripple effects through markets, the SEC's response will be closely watched for possible application to digital currencies with similar features to XRP.