Home Alts News Opinion: Regulatory Overreach – The SEC vs. XRP

Opinion: Regulatory Overreach – The SEC vs. XRP

By: Publius

By: Publius

Editor’s note: The author of the following guest article is a chief executive officer in the financial services industry, who, for fairly obvious reasons, elects to share his thoughts on this subject anonymously. The DI Wire does not normally publish articles that do not disclose the author. In this instance, however, we have allowed it given the nature of the piece, the importance of open discussion and varying viewpoints, and the fact that we have personally confirmed Publius’ identity.

Over the last few months, we have begun to explore concerning instances of apparent regulatory overreach by the nation’s most powerful securities regulator, the Securities and Exchange Commission. We have examined how the SEC affects everyone, from the largest banks down to small businesses. We have also explored the SEC’s egregious whistleblower program and, most recently, the concerning similarities between the SEC and nefarious perpetrators of illegal “protection rackets.” Today, we will continue our look at the SEC’s potentially abusive regulatory actions through a deeper dive into the ongoing case of the SEC vs. Ripple Labs Inc.

On December 22, 2020, the SEC filed a lawsuit against Ripple Labs and two of its executives – co-founder Christian Larsen and current CEO Bradley Garlinghouse. The SEC charged the company with allegedly trading more than $1.3 billion in their cryptocurrency, XRP, as a security without registering with the SEC.

The SEC argued that XRP is a security because it was used to finance Ripple’s platform and, in turn, the executives profited from the sale of the cryptocurrency. Under the SEC’s regulations, all securities must be registered with the commission unless subject to an available exemption. The agency claims that this must be done in an effort to combat fraud and protect investors. While the usual response from any company, large or small is to settle (remember that, as reported on ComplianceWeek.com, 60 percent of enforcement actions are resolved before the SEC even files a lawsuit), Ripple has chosen to fight back.

The definition of a security, under Section 2(a)(1) of the Securities Act, is extremely broad:

any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security,” or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

Did you get all of that? In regards to XRP and Ripple, the SEC alleges that Ripple used XRP as a means to finance its business of cross-border transactions for financial institutions. If true, according to the SEC, Ripple therefore violated securities laws by failing to register its XRP cryptocurrency as a security.

Ripple, of course, disputes the SEC accusation and contends that XRP is not a security and that the SEC is treating them unfairly and inconsistently. Ripple claims that the SEC is biased in how it defines virtual currencies as securities. In a 2018 interview with CNBC, then SEC Chairman Jay Clayton stated, “Cryptocurrencies are replacements for sovereign currencies. That type of currency is not a security.”

In June 2018, William Hinman, former director of corporate finance at the SEC, stated in a speech at the Yahoo Finance All Markets Summit in regards to Ether, “Putting aside the fundraising that accompanied the creation of Ether, based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions.” At the time of this speech, Ether was the second most popular cryptocurrency.

The fundraising that Hinman is referring to is Ethereum’s 2014 ICO, which raised over $18 million, as reported in an article by CNBC, and would seem to make Ethereum a security. What’s more, the SEC has requested the personal financial information of the two Ripple Labs executives involved, a move which Larsen and Garlinghouse called “wholly inappropriate overreach,” as the suit does not involve any alleged fraud.

While it may be debatable as to whether or not the SEC is biased in its approach to cryptocurrencies, there seems to be little question that they operate in an often confusing, opaque, inconsistent, and damaging fashion.

Whatever the merits of their accusation against Ripple, the fact remains that the price of XRP plunged once the lawsuit was announced, losing $15 billion in market cap, according to Ripple’s lawyer, Mary Jo White (herself a former SEC chair), and largely “at the expense of ordinary investors the SEC is charged with protecting.” At the time of this writing, XRP was trading between $0.50 and $0.60.

This only seems to speak further to the power that an SEC allegation holds: Once an individual or company is named, they are essentially blacklisted, or, in the case of XRP their value plummets. And while Ripple Labs has the pocketbook and dream team of lawyers to fight back, how has their progress been reduced by fighting this SEC lawsuit? How much investor wealth has been destroyed by the process? Could their resources have been used for further innovation? Have other innovators taken a look at this case and decided that the potential risk is not worth it?

Before the lawsuit, XRP was the third most popular cryptocurrency. Today, XRP is the seventh largest cryptocurrency by market cap. Crypto itself is, potentially, one of the most impactful developments to be seen in recent memory. It offers the possibility of fast and secure transactions, instantly, around the globe. Yes, investors should be aware of the risks, and efforts should be made to protect them, but this type of innovation, and the entrepreneurs who create it, should not be stifled due to an entity that consistently reaches too far.

As a country, the United States is built by risk-takers and entrepreneurs who have always had large goals and ideas. But our country is also built on a system of checks and balances, intentionally designed to limit overreach by any one particular branch.

We must continue to encourage entrepreneurs to swing for the fences, even if sometimes they lose. When we have an all-powerful, overarching entity, such as the SEC, limiting this creativity, in what seems to be an arbitrary and possibly self-interested way, we begin to send a message to these business leaders that they should not aspire to greater heights. This is not just bad for business or our economy; this is completely un-American. There must be a better way.

What are your thoughts on the SEC in regards to the Ripple Labs case? Have you had experience yourself with the SEC and its overreach? Email me at Publius.Connect@gmail.com and let me know your thoughts. Thank you to everyone who has reached out and shared your stories. As always, I write this in the spirit of support for our country and the opportunities it provides. I believe it is our duty to continue to better our industry in an effort to ensure that these opportunities remain viable to all who wish to pursue them.

This article is not investment advice, nor should it be considered an endorsement of XRP, Ripple Labs Inc., or cryptocurrency in general. Please consult your financial advisor for specific investment advice.

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The views and opinions expressed in the preceding article are those of the author and do not necessarily reflect the views of The DI Wire.