Topline
The value of XRP, the world’s third-largest cryptocurrency by market capitalization, is tumbling on Tuesday after the CEO of Ripple, which launched XRP in 2012, warned that the Securities and Exchange Commission is prepping to sue the firm for the alleged sale of unlicensed securities–a sign U.S. regulators could ramp up oversight of the cryptocurrency space as the market surges to new highs.
Brad Garlinghouse, the CEO of Ripple attends a conference in Saint-Denis, near Paris.
Key Facts
Ripple CEO Brad Garlinghouse says the SEC is naming him and cofounder Chris Larsen as defendants in a lawsuit alleging that the firm’s XRP token is a security–and therefore under the SEC’s purview–as opposed to a currency, as Ripple argues.
Though the SEC hasn’t commented on the matter, Garlinghouse says the lawsuit is set to be filed in the “near future” in federal civil court, Fortune first reported Monday night.
As of 12:30 p.m. EST, the value of the XRP token had plunged roughly 10% over the last 24 hours, according to crypto data firm CoinMarketCap, wiping out more than $2 billion from the cryptocurrency’s market cap.
“It’s not just Grinch-worthy, it’s shocking,” Garlinghouse told Fortune of the lawsuit, later tweeting that Ripple, a San Francisco-based firm last valued at $10 billion in 2019, “is ready to fight” the suit. “It’s an attack on the entire crypto industry and American innovation.”
The SEC has largely cracked down on crowdfunded token sales, commonly referred to as initial coin offerings, but XRP would be the largest cryptocurrency targeted by the SEC as a security; officials in 2018 declared ether and bitcoin were currencies and not securities because of their decentralized nature.
The SEC did not immediately respond to Forbes‘ request for comment.
Big Number
$653 billion. That’s the current market value of all the cryptocurrencies across the world, more than tripling this year alone, according to CoinMarketCap. At its peak in January 2018, the market was valued at more than $800 billion. XRP’s current market cap of $21.6 billion is bested only by ether ($71 billion) and bitcoin ($435 billion).
Key Background
Heightened regulatory scrutiny from nations such as South Korea triggered a near-85% crash in cryptocurrency prices in 2018, but the United States has been slow to issue broad-based regulation. Among the most vocal U.S. regulatory agencies when it comes to cryptocurrency, the SEC spent months drafting guidance it released in April 2019 about when and how cryptocurrencies may be classified as securities, but it’s been relatively quiet on the front ever since. A suit against Ripple, however, could mean that’s set to change as the cryptocurrency market soars toward new highs during the pandemic. “There is more and more interest from a wide spectrum of people, both inside the crypto space as well as inside the traditional financial institutions who are asking us for guidance,” an SEC Commissioner told CoinDesk in October. “I think we’re going to be forced to confront that more and more in the coming years.”
What To Watch For
Competition–from the government. Though it has not committed to the idea, the Federal Reserve is exploring the possibility of debuting its own central bank digital currency, Goldman Sachs said in a Sunday note. Officials have warmed up to the idea of a central bank token “largely out of concern that wide adoption of alternative digital currencies could endanger financial stability, U.S. financial intermediaries and the Fed’s ability to influence financial conditions,” Goldman analysts led by Jan Hatzius said.
Tangent
During the pandemic many investors have flocked to cryptocurrency–and namely bitcoin–as a hedge against longer-term inflation concerns, which have escalated in the face of increased government spending for coronavirus relief measures. In a report released Monday, digital asset management firm CoinShares said cumulative investments into cryptocurrency funds have totaled about $5 billion so far this year, eclipsing the approximately $1.4 billion plowed into the space through the end of last year.
Crucial Quote
“Other major branches of the U.S. government, including the Justice Department and the Treasury Department’s FinCen, have already determined that XRP is a currency,” Ripple Counsel Michael Kellogg said in a statement to Forbes, arguing that the currency designation means XRP transactions fall outside the scope of federal securities laws. “This is not the first time the SEC has tried to go beyond its statutory authority. The courts have corrected it before and will do so again,” he added.
Further Reading
Ripple says it will be sued by the SEC, in what the company calls a parting shot at the crypto industry (Fortune)
As Bitcoin Surges 15%, Here’s What Wall Street’s Saying About The Cryptocurrency’s Meteoric Resurgence (Forbes)
U.S. Government Voids Public Comments On Newly Proposed Crypto Wallet Rule (Forbes)
