SEC Charges Ripple With Selling $1.3 Billion In Unregistered Securities, XRP Loses $2 Billion In Market Value

Topline

The Securities and Exchange Commission has charged cryptocurrency pioneer Ripple Labs, whose founders created the world’s third-largest cryptocurrency, for allegedly raising $1.3 billion in an offering of unregistered “digital asset securities”–a huge sign U.S. regulators could ramp up oversight of the cryptocurrency space as the market surges to new highs.

Key Facts

Crucial Quote

“We allege that Ripple, Larsen and Garlinghouse failed to register their ongoing offer and sale of billions of XRP to retail investors, which deprived potential purchasers of adequate disclosures about XRP and Ripple’s business and other important long-standing protections that are fundamental to our robust public market system,” said Stephanie Avakian, director of the SEC’s enforcement division on Tuesday.

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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. The 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.

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Chief Critic

“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)

Ripple’s Trillion-Dollar Man (Forbes)

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)