Here is the notice I sent to Ripple employees today regarding Ripple’s preliminary legal response to the SEC’s complaint.
Hello Ripple team,
Since the SEC filed its complaint in late December, its side of the story is the only one that has been publicly shared. Our first answer was finally submitted today. The “answer” is a legal document (filed publicly) which, as the name suggests, is our official response to the allegations in the SEC’s complaint. While our strategy is not fully outlined (more will be released in court), this is our first opportunity to set the record right.
Although the legal process is slow, we are working to resolve this as soon as possible in order to provide clarity to the wider market. Acting quickly is important because, as you know, XRP has lost nearly half of its market value since the SEC filing the complaint, resulting in XRP retailers unrelated to Ripple – the very people who run the SEC wants to protect – billions of dollars suffered in losses. Additionally, part of the SEC’s mission is to maintain orderly markets … and yet its overreach has devastated 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 filing that 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 from XRP were an investment contract. To be clear, there are no allegations of fraud, misrepresentation, etc. Although we’ve seen quite a few Twitter commenters suggest that this is a non-fraud / scam case, a freshman law student can tell you that there is no such thing. It is misleading and irresponsible (not to mention stupidity) to suggest anything else. Turn to what matters …
In our “answer” we explain why there is no “investment contract”:
- XRP is a virtual currency and is therefore outside the jurisdiction of the SEC.
- Ripple has never signed an investment contract with owners of XRP.
- Ripple never had an ICO, never offered future tokens to raise funds, and has no relationship with the vast majority of XRP holders.
- Holding XRP does not mean that any person will receive any portion of Ripple’s earnings or profits.
- Ripple’s XRP sales were far less than 1% of the massive XRP market that has grown over the past 8 years.
- The XRP ledger that XRP actually moves on is completely decentralized. The SEC ignores the economic reality of an XRP transaction.
- Ripple’s XRP holdings no longer create an investment contract than converting DeBeers diamonds into securities.
The SEC is not on the right track at home and abroad
Before this case, no securities regulator worldwide has claimed that transactions in XRP must also be registered as securities, and rightly so. The functionality and liquidity of XRP are completely incompatible with securities regulation. The requirement to register XRP as security would detract from the main benefit.
In fact, U.S. government regulators (Department of Justice and FinCEN) determined that XRP was a virtual currency in 2015 and 2020 and have since regulated it as such. Basically, on its way out, the Trump administration tried to reverse the finding that XRP is a virtual currency that was made during the Obama administration.
Globally, this also applies to regulators – the UK Financial Conduct Authority and regulators in Singapore and Japan have concluded that XRP is a virtual currency or a crypto asset and not a security. With its complaint, the SEC asks the court to contradict the findings of the agency’s colleagues in the US and worldwide.
The SEC picks winners and losers
While XRP is the most efficient digital asset for global payments, benefiting consumers around the world (and which is the most environmentally friendly crypto), there is no fundamental difference between the current function of XRP and that of BTC or ETH. How does the SEC explain to the public that BTC and ETH are not securities and then turn around and claim that the opposite is true for XRP?
What is particularly interesting here is that at one point the SEC claimed that ETH might have been born as a security but eventually evolved into a non-security and provides no guidance or framework for that determination. We only require a clear statement of the rules and a uniform application of these rules. We sent a FOIA request to the SEC asking for more information on how the decision was made in hopes to gain more clarity on how they came to the initial conclusions about ETH.
In addition, XRP is much more environmentally friendly than BTC and ETH as it avoids the degradation process. The energy needed to mine and validate BTC transactions leaves a huge carbon footprint compared to the low energy consumption of XRP transactions. That must be important from a political point of view.
The SEC has skewed the facts
The complaint filed by the SEC is full of out of context quotes and draws conclusions that are unsupported by fact or the law. With our answer we begin to clear the record. While we cannot go into all the details in this format (we will do so as the case progresses), you will see that we have denied many of the SEC’s allegations. In time you will see why.
I’m going to share a quote from one of our outside lawyers with his assessment of the case – I think the situation can be summed up pretty well:
“The case of the SEC is unprecedented and ill-conceived. The SEC has ignored the clear status of XRP as a virtual currency and contradicts not only the results of other US regulators, but also international regulatory systems. For the past eight years, the XRP market has been has grown to massive trading on over 200 exchanges worldwide regardless of Ripple’s activity. The SEC is now pushing the concept of an “investment contract.” We look forward to bringing our case to court. “Andrew Ceresney, Debevoise & Plimpton
I’d like to thank Team Legal for all of their hard work in this area – and on behalf of Brad, acknowledge the broader Ripple team for continuing to focus on cracking down on our vision as we take this case to court.