Ripple to Face SEC Suit Over XRP Cryptocurrency

 Ripple to Face SEC Suit Over XRP Cryptocurrency

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Ripple CEO Brad Garlinghouse says the Securities and Exchange Commission is ‘wrong in matter of law and fact.’

Ripple CEO Brad Garlinghouse says the Securities and Exchange Commission is ‘wrong in matter of law and fact.’

Photo: Wei Leng Tay/Bloomberg News

Ripple Inc. said it will defend itself against a lawsuit from the Securities and Exchange Commission that claims the company violated investor-protection laws when it sold a bitcoin-like digital asset called XRP.

The suit, which hasn’t yet been filed, would be one of the highest-profile SEC actions against a cryptocurrency pioneer, just as the regulator’s chairman is departing at the end of the Trump administration. The SEC over the past few years has brought and mostly won civil lawsuits alleging startups trampled securities laws when they raised money by selling cryptocurrencies.

None of those companies, though, was as big as Ripple and XRP. Ripple had a $10 billion valuation in its most recent funding round in 2019, and XRP is the third-largest cryptocurrency by market value.

A representative for the SEC wasn’t immediately available for comment.

Ripple said it was informed by the commission on Monday that regulators soon plan to sue the company, Chief Executive

Brad Garlinghouse
and co-founder

Chris Larsen
in federal civil court. The company and the officers say they plan to fight the claims.

“They’re wrong in matter of law and fact,” Mr. Garlinghouse said.

The lawsuit revolves around whether XRP, a digital asset that the company launched in 2012, is actually a security that should have been registered with the SEC. Registration involves providing the SEC and the public with disclosures about a company’s business model, risks and financial condition. The SEC reviews the disclosures and provides feedback to improve them for investors.

It isn’t known what the SEC is seeking through its lawsuit, though in similar cases it has obtained financial penalties and a requirement for digital-asset sponsors to provide ongoing disclosures to investors—just like the periodic disclosures that public companies provide.

XRP is similar to bitcoin and other cryptocurrencies, but also different in key ways that sparked the SEC’s investigation. Bitcoin was an open software project launched by a pseudonymous creator calling himself

Satoshi Nakamoto.

XRP, initially called Ripple, was created, sold initially and backed by Ripple the company.

Ripple has significantly altered its relationship to XRP, turning control of its development over to an open-source network of independent developers. But the company still holds about 6.4 billion XRP directly and has an additional 48 billion held in an escrow from which it periodically sells them to the public.

It has distributed 45 billion XRP since inception. That is different from the ways in which bitcoin is created and distributed.

The SEC has said neither bitcoin nor ether, another well known cryptocurrency, are securities. But the agency has been circumspect about granting other digital assets a pass to skirt federal oversight.

Mr. Garlinghouse, who has criticized what he says is a lack of regulatory clarity for many digital assets, questioned why the commission, and specifically the agency’s chairman,

Jay Clayton,
chose now to take a stand on XRP.

“That to me makes no sense,” he said. “It’s kind of preposterous.”

Mr. Clayton has said he is leaving the SEC by the end of the year. He has mostly taken a skeptical view of cryptocurrencies, saying many appear to fall within the legal definition of a security.

Write to Paul Vigna at paul.vigna@wsj.com and Dave Michaels at dave.michaels@wsj.com

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