SEC files suit against Ripple – What will happen in a worst-case scenario?

  • The SEC has now officially sued Ripple Labs and its founders for an unregistered, ongoing $1.3 billion securities offering.
  • The implications from the lawsuit are many. However, the business model around XRP could continue worldwide

It’s the defining topic in the crypto market – the US Securities and Exchange Commission’s lawsuit against Ripple. After Ripple Labs preempted the SEC yesterday and informed about the impending lawsuit, the US Securities and Exchange Commission (SEC) has now officially filed charges against Ripple Labs and Brad Garlinghouse as well as Chris Larsen.

The lawsuit, which was filed in federal district court in Manhattan, accuses Ripple and its two co-founders of raising over $1.3 billion through “an unregistered, ongoing securities offering for digital assets.” The SEC also alleges that Ripple Labs also used billions of XRP in exchange for non-cash consideration, such as labor and market-making services.

Larsen and Garlinghouse further allegedly failed to register, or satisfy an exemption from registration, for their personal XRP sales totaling approximately $600 million each, in violation of the registration provisions of the federal securities laws.

What are the implications for Ripple and XRP?

First, it is important to note that Ripple is accused of violating the registration provisions of the Securities Act of 1933. Accordingly, the SEC is seeking injunctive relief, restitution with prejudgment interest, and civil penalties. As Cardano inventor Charles Hoskinson explained in a video, the case at hand is a serious enforcement action, so the suit will probably not end with the payment of a fine, as happened with EOS:

It’s very clear that this is a heavy-handed enforcement action. That is not something that I think they want somebody to pay a fine.

A cease and desist order from the SEC could mean that Ripple would have to sell XRP tokens as securities in the US. As a result, most cryptocurrency exchanges would be forced to delist XRP, which would have a massive impact on liquidity in the US. Should exchanges fail to delist XRP, they could face penalties for allowing retail customers to trade an unregistered security.

But not only the liquidity, but also the price could fall further. Over the last 24 hours, the XRP price has crashed another 21% and is trading at $0.36 as of press time. An exclusion of American investors for the crypto market could mean another dump.

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But things could also get uncomfortable for Garlinghouse and Larsen. Since both failed to register their XRP sales, according to the SEC, they could face the return of their profits and civil penalties.

It is also questionable how Ripple’s American partners will fare. MoneyGram, in particular, appears to be in the SEC’s sights. While the payment service provider is not mentioned by name in the SEC’s writing, Ripple’s payments to MoneyGram are described as market-making services. In this sense, the SEC writes that “the onboarding for ODL was not organic or market-driven”, but was “subsidized by Ripple.”

A MoneyGram spokesperson told Coindesk that it has not yet noticed any “negative impact” on its long-standing business agreement with Ripple. “MoneyGram will continue to monitor the situation as it develops,” he said.

A glimmer of hope?

While things don’t appear to be looking good for Ripple and the XRP price right now, a potential SEC victory doesn’t have to mean an end to Ripple and On-Demand Liquidity’s business model. In November, Garlinghouse said that because the majority of RippleNet’s customers are located outside the United States, a classification as a security would not necessarily affect the company’s business.

In addition to Garlinghouse, who asserted that the lawsuit will not impact the “thriving XRP ecosystem,” Yoshitaka Kitao also spoke out yesterday. The chairman at Japanese financial giant SBI and board member at Ripple stated that the joint expansion in Asia will continue:

Japan’s FSA has already made it clear that XRP is not a security. I’m optimistic that Ripple will prevail in the final ruling in the US. SBI Holdings remains a steadfast partner to Ripple, and looks forward to expanding together in Asia.

About Author

Jake Simmons has been a crypto enthusiast since 2016, and since hearing about Bitcoin and blockchain technology, he's been involved with the subject every day. Beyond cryptocurrencies, Jake studied computer science and worked for 2 years for a startup in the blockchain sector. At CNF he is responsible for technical issues. His goal is to make the world aware of cryptocurrencies in a simple and understandable way.

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