Ripple is a real-time gross settlement system which aims to create a new model primarily for the settlement of large financial transactions, but also as a new means of exchange for medium and small sized businesses.
The company has come under criticism for its centralized corporate governance model and 100% pre-mine. It has already paid a fine to FinCEN for failing to register as a Money Services Business and is currently fighting two lawsuits, with a third unveiled in late June according to court documents. Unlike previous cases, the third security lawsuit contains Ripple price manipulation allegations.
Ripple Price Manipulation?
The third lawsuit dated June 27th alleges that Ripple Labs Inc (the company that owns Ripple and the majority of the XRP token supply) and its CEO have illegally profited from price increases. As owners of XRP, there is a profit incentive to drive prices upwards. The crux of the plaintiff’s case is that XRP is a security and the defendants failed to register it as such. Further, the representations made by the defendants were designed to drive up the price and demand, allowing the defendants to obtain greater returns.
“Despite the state of XRP as a security, defendants failed to register it as such…many of the representations defendants made regarding XRP were designed to drive demand for XRP, allowing defendants to obtain greater returns on their XRP sales…here XRP has all the hallmarks of a security”
How Realistic is the Third Security Lawsuit?
The question of whether a cryptocurrency is a security or a commodity is critical in terms of its regulations and how it trades. However, Ripple has already paid a fine to FinCEN, on the basis that XRP is a currency and the company is a “virtual currency exchanger”. It is questionable whether it is legally equitable to now change its status and punish it for failing to register as a security. It would effectively be punished twice for the same offense.
Further, SEC chairman Jay Clayton was quite clear in a CNBC interview when he indicated that major cryptocurrencies such as bitcoin would not be deemed securities for the purpose of regulatory oversight. This third Ripple lawsuit appears to draw on earlier statements from Jay Clayton which do not represent his most recent position.
Additionally, marketing a cryptocurrency does not constitute Ripple price manipulation. All organizations are going to promote their projects. While there are many question marks surrounding Ripples centralized corporate governance model, this case does not appear overly robust.
However, court cases can be complex, and it is difficult to say what the final rulings will be. The cryptocurrency industry is still new and case law needs to be established to provide legal guidance. Regulatory clarity is still welcome. Additionally, Ripple does have certain attributes which set it apart from other major cryptocurrencies.
But Ethereum has been given the all-clear from a top SEC official, and Clayton seemed unambiguous in his statements that top cryptocurrencies would not be deemed securities. Should this case, and the other two, indicate that Ripple is indeed a security, it could result in more confusion in the regulatory market.
Digital Nomad with an interest in Zen and Blockchain technology.
Law graduate with 3 years experience as a consultant in the capital markets industry and 4 years experience freelancing on UpWork as a Creative Writer.